Examination of Witnesses (Questions 220
- 237)
WEDNESDAY 10 JUNE 2009
MS REGINA
FINN AND
MR KEITH
MASON
Q220 David Taylor: So Ofwat's culpability
for this debacle is vanishingly small, in your view?
Ms Finn: I think it is really
important to remember that the principle of fair charging has
to apply—fair and non-discriminatory charging—
Q221 David Taylor: Your culpability
is negligible?
Ms Finn: The issue here in this
case was the poor implementation of the policy by UU.
Q222 David Taylor: You have said
that it is for Parliament to decide on social policy but Defra
has given you guidance, has it not, on social and environmental
issues. Just in a couple of sentences could you describe how detailed
or adequate that particular guidance is?
Ms Finn: Defra does provide guidance
which we adhere to and I think that this is an area that is one
of those that we think is a very interesting and significant debate
to have in the future. I know that government has asked Anna Walker
to review metering and charging issues—
Q223 David Taylor: I will come on
to that.
Ms Finn: ... and that is a useful
forum in which to consider this. The guidance that we have at
the moment we implement, we work within and it provides us with
the framework within which we carry out our statutory duties.
I think what we have said specifically is if there are to be particular
social policy choices, that particular customers or groups of
customers are to be treated differently, i.e. in a discriminatory
way, then that is a social policy choice and clearly that is a
matter for Parliamentarians to make a choice on and we will implement
whatever appropriate guidance is put in place by policy makers.
Q224 David Taylor: Does not the Defra
guidance already give you the necessary powers to pursue social
tariffs?
Ms Finn: Our powers are given
to us in legislation; guidance is something we have regard to.
When we have regard to carrying out our powers in a way that takes
account of different groups of customers we do so within the framework
of ensuring that charges are fair to all customers, so that is
our primary duty—to make sure that they are fair. We have
done quite a number of issues around this area, including approving
a wide range of tariff trials and encouraging companies to bring
in tariffs that deliver social benefits—not where they introduce
new cross-subsidies; it is not our role to say, "You may
charge this group of customers more to subsidise this group of
customers." What we do is to say, for example, if you can
introduce specific tariffs that may be linked to benefit systems
that may help customers pay their bills and make it easier that
do not involve new cross-subsidies we both approve but, more than
that, we actually actively encourage companies to do that. So
within the framework of our duties we do encourage those types
of tariffs. Introducing new cross-subsidies, i.e. charging one
group of customers more to subsidise another group of customers
is a much more explicit social policy and that is one where we
would look to Parliament to make that decision and to implement
it in legislation.
Q225 David Taylor: Surely there is
quite a wide range of ways in which cross-subsidy exists within
the water industry at the moment, is there not?
Ms Finn: Unquestionably, and as
far as we are concerned introducing new cross-subsidies, particularly
in the face of customer research—I know that CC Water has
brought this to your attention—where customers say that
they are not willing to cross-subsidise other groups of customers,
that requires a step back and a consideration of the policy that
government wants implemented here and how—particularly when
bills for a lot of customers are becoming more and more difficult
to pay—government wants to see those customers assisted.
Q226 David Taylor: Debt collection
is cross-subsidy, is it not?
Ms Finn: At the moment that is
an area where we have made quite a number of recommendations that
we hope to see ultimately included in the Flood and Water Management
Bill. Companies have carried quite a bit of bad debt; where customers
do not pay their bill they cannot be disconnected—this is
a vital service for life and that is understandable. And where
customers are vulnerable and have difficulty paying we require
companies to have debt guidelines where they handle those sensitively.
There are quite a significant number of customers who can afford
to pay their bill but do not and the carrying of that debt adds
about £11 to the average water bill; so recovering that money
from the people who will not pay but can afford is a very important
part of what we encourage companies to do, and we have proposed
some legislative changes to try and facilitate that.
Q227 David Taylor: Does Ofwat speak
in a rather more coded language than Ofgem or Ofcom do then?
Ms Finn: I am not sure what that
question means. I do not think we seek to speak in coded language
at all.
Q228 David Taylor: Are you clear
and open with your communication with the public? Can I ask you
to explain the statement: "We will not make price limit allowances
where we have discretion and where there is no evidence of willingness
to pay."[2]
That was in your submission. What does that mean in plain English?
Ms Finn: Could you point me to
the section, please?
Q229 David Taylor: The whole submission
starts: "We will challenge company plans to make sure that
price limits ... " etcetera. That is what your submission
says. I would normally have linked up the paragraph number but
I have not on this occasion. Do you not recognise that?
Mr Mason: I think this is where
part of the work we were doing in relation to what customers were
seeking to get out of the review; and coming back to the question
about how we consulted customers, part of that work was to say
what are customers willing to pay for improvements? I do not have
the sentence in front of me, but I think what that is saying is
that we would look at what companies are putting forward in terms
of improvements or particular schemes and then consider whether
customers in that particular area were willing to pay for that
improvement. That applies mostly to discretionary schemes, I would
suggest, because obviously the mandatory schemes are mandatory.
So without having it there I suspect that is what we were trying
to say in that sentence.
David Taylor: We will come back with
chapter and verse before the end of the session, I hope, on that
one.
Chairman: I hope so too.
Q230 Mr Drew: Can we look at the
issue of Cave and how much influence Cave has had over this Act.
Can you just give me a feel for how much you think the Cave Report
has influences you in moving towards an even greater reliance
on competition?
Ms Finn: I think that the Cave
Report is a very important step in the debate about how the sector
should develop over the long term in consumers' and customers'
interests and the use of market mechanisms to deliver some of
the things that I was talking about earlier; so to deliver benefits
to customers and also to deliver information to help us to reveal
and understand the value of the resource that we use and make
sustainable choices. We note that the government has committed
to consulting on the Cave Report and including in the legislation
clauses to implement the recommendations of the report where appropriate.
So I think Martin's report is influencing the Flood and Water
Management Bill and that is an important debate. In terms of PR09
our work in PR09 continues to involve setting price limits for
vertically integrated monopoly water companies because that is
what we have, and therefore we will continue to do that. At the
same time we are taking forward work on a number of fronts around
the introduction of more market forces in this particular sector,
and that includes—and I think there is some mention with
the Environment Agency on abstraction licences where we are looking
to work with them to identify the opportunities for trading abstraction
licences, which will help us better understand the value of water
in different areas of the country and therefore hopefully drive
better investment decisions over time. Similarly we are working
within the existing legislation to implement, in so far as we
can, more effective choice for business customers and at the same
time we are looking to Martin's review and the consultation and
subsequent legislation to deliver us the flexible tools that we
need to drive that in the interests of customers further forward
because there are limitations on where we are now.
Q231 Mr Drew: You have a clear split
in the water companies. On the one hand you have those who will
be very keen on greater competition, but obviously Welsh Water,
as you know, has highlighted its concerns that this could undermine
the public service requirement that they see as central to their
position as this facility. How do you actually match those two
conflicting objectives?
Ms Finn: I think the starting
point has to be that any evolution of the market has to be for
a reason of this sector. It has to benefit customers in the long-term;
it has to help us deliver on our objective of a sustainable water
and sewage sector and so the starting point must be that the core
service to customers would always be protected and that would
never be exposed and that would always be protected throughout
any development or any introduction of market mechanisms, and
that can be done. I think the power of introducing more choice
is what we have seen happen in Scotland, which is where business
customers have choice. They have choice in everything else that
they choose as an input price. They see benefits in terms of quality
of service and engagement of their water company and the evidence
of that now is happening in Scotland; so that is an area that
can easily deliver benefits and it does not compromise.
Q232 Chairman: How much difference
is it making to customers' prices?
Ms Finn: In Scotland the Water
Industry Commission for Scotland has noted that for business customers
there is a benefit across the board in the region of 10% or so
of retail costs, but it accrues not just to people who change
to a new supplier, it accrues to everybody because the monopoly
service provider or the former monopoly also becomes more competitive
in its service to customers. We are working on the scope for benefits
for business customers here, how that competition could be introduced;
how it can be done in a sustainable way and at the retail level
for businesses it is like any other input cost and at a time when
British industry needs to be very careful about its input cost
to remain competitive we think that there is a compelling argument
for developing that. I think the big benefits of reform of market
and market forces here are to be seen when we start to look upstream
and to understand better the value of water in different places
in the country, different companies understanding the value of
water and therefore making, we hope, more sustainable investment
decisions. So that would be the area that we think needs further
work and is very important in the long-term.
Q233 Mr Drew: Let us predict forward
and look at the pricing structure and the capital costs based
on different water companies, can you give me an assurance that
competition is actually going to reduce the price, reduce their
capital costs, or is that impossible to say?
Ms Finn: I think the important
thing is that it is necessary to introduce market mechanisms in
an incremental evolutionary way—and we certainly agree with
that as part of Martin's review and part of the work that we are
doing—in a way where the benefits are proven before we make
changes that are significant. So if a change in this market were
actually to dis-benefit customers and not work then there is not
a point in making that change. So what we are looking for is the
flexibility to start to reveal better information about the value
of water and the costs and the opportunities for market forces
within this value chain, and then introduce those changes over
a period of time where they can be tried and tested and deliver
benefits ultimately to the consumer, and that means benefit in
totally rather than picking on any one bit of what the water companies
do.
Q234 Mr Drew: Let us be perfectly
frank here. You are talking about competition around the margins.
The key thing about water is that there is one water company for
one part of the country supplying those customers within that
part of the country. Yes, you can have some competition around
who constructs the water mains or who maintains aspects of the
flow of water, but the reality is that the competition is always
going to be marginal to this industry.
Ms Finn: We would not agree with
that because we think right now that the key issue here is that
we do not have the information revealed to show where market forces
could deliver benefits. I will give you an example: at the moment
water companies collect, treat, store and deliver water. They
incur the costs of that storage and treatment but there is not
any clear understanding of the value of the water in different
areas of the country, so in theory if two water companies who
were side by side both saw a need to increase the amount of water
that they supplied and both decided that they were going to build
an asset, be it a treatment plant or a storage reservoir or something,
either side of their border they would do that; they would both
incur the costs of doing it; they would both incur the carbon
costs of pouring the concrete. In fact, if they both understood
the value of the water one of them might understand that the other
one could do it cheaper and perhaps they might invest in building
a pipe and buying water from the other company rather than building
two sets of assets. That is hypothetical. Until we can reveal
the proper understanding of the cost, the efficiencies and the
value of water in this value chain we cannot truly see those opportunities.
We need to see that information revealed so that sustainable investment
choices can be made for the long term.
Q235 Mr Drew: Looking at the impact
of competition on different stakeholders within the water industry,
again it is clearly stated that something like 96.5%—I suppose
that is a fairly clear picture—of the cost of water pollution
is borne by the customer. Again, Defra has made it clear that
that is an unfair burden and I would be interested to know if
the customer is going to pay less who would pay more; but if you
accept that that is an unfair burden how do you reduce the amount
that the customer is expected to pay?
Ms Finn: I think you are talking
about the cost of maintaining the water environment, which means
cleaning up diffuse pollution and ensuring that we have good quality.
Q236 David Drew: And redress, which
is a bit of a sore point at the moment.
Ms Finn: You are right, a huge
proportion of that cost falls currently on the water companies
and water customers, and we would agree that if you come back
to the principle of the people who caused the pollution should
therefore pay for it to be cleaned up—which is the polluter
pays principle—in order that they are incentivised not to
pollute in the first place, we would see that as an important
principle that should apply in the implementation of, for example,
the Water Framework Directive as it is rolled forward. Essentially,
that means those people who are causing the pollution, be it industry
or agriculture, would pay the costs of that clean-up, and therefore
they would be incentivised not to do that. I think there are a
number of initiatives and innovations that we have put in place,
PR '09, to help with this, including encouraging water companies
to work on catchment management schemes, to work with farmers
upstream to try to reduce pollution. Where that reduces the cost
of treating the water downstream, therefore it reduces the cost
to the customer, and we have seen a significant increase in proposals
from companies around that area. There are more than 100 of those
proposals in business plans, which we are very pleased about.
At the same time, that still is incurring costs on our water customers,
and we think there is a bigger debate about ensuring that those
individuals or organisations who cause the pollution are responsible
for paying for the cost of cleaning that up in the longer term.
Q237 David Taylor: I have one final
point on the last point, Chairman. That impenetrable sentence
in "Ofwat code" that I quoted to you I found in your
submission to the price review towards the end of paragraph 34,
maybe you could write to us on that to explain. Do not do so now,
because we have other things to do.
Mr Mason: I think the answer I
gave you is the right one. We are trying to link what customers
are willing to pay for with what we allow in price limits. That
is all that the—you are probably right—"coded"
sentence was meant to say.
Ms Finn: If that is unclear, we
are always willing to try to clarify it.
David Taylor: Perhaps you would put it
in writing, so that it can go into the Committee records. Thank
you.
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