Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 40 -59)



  40. You do not really know that. Do you not need to know more about your assets before you can make statements of that kind?
  (Mr Fletcher) It is true to say that we need to go on pushing the companies to know more about the state of their assets. I am not saying that it is easy. We are talking very largely about assets which are underground and which may still be fit for their purpose even when—and I have no doubt the Committee has been to see them—some of them look in a very ropy state indeed. I too have been shown them. If they are still doing the job, and they are looked at by engineers whose professional job it is to say whether it is about to fail, whether it is about to become unfit for purpose, then although the stitch in time principle is a valid one, our start has to be what is going on now. What is happening across the industry and what we are seeing are indicators of outputs and outcomes which lead us to believe that things are certainly not getting worse and if anything getting better.

  41. Is this not the same problem that the railway industry faces? Suddenly we are confronted with a huge crisis which really resulted from intellectual neglect of the problem of asset maintenance.
  (Mr Fletcher) Clearly the regulators do talk to each other and I am not talking here about my colleagues in the Environment Agency and the Drinking Water Inspectorate but the economic regulators, to ensure that we are learning lessons from each other. In talking to Tom Winsor, the Rail Regulator, I seek to learn from him what the circumstances are. I do not believe that a ready analogy can be drawn between water and railways, where the passage of a high speed train over a cracked rail leads potentially at least to an absolutely catastrophic crash with loss of life. That is not to say that within the water environment there are not some things which require just as much care and attention. The maintenance of dams to prevent catastrophic failure or reservoir dams is obviously one such and there is legislation in place and very careful inspection in place to ensure that. I have experts behind me who would tell you a lot more about it than I can. But, when we are talking about the sewer age and the drinking water mains, it is a very different category of infrastructure, one in which yes, bursts are an important thing. Sometimes they can be quite damaging when they boom suddenly and you get a jet of water going right through the road. But that is not a very common circumstance in the middle of a busy thoroughfare and it is the company's job to keep a watch on their asset, using things like bursts to indicate to them where more than just going on making do and mend is needed and where they need a full-scale relining or renewal.

  42. Is there a financial problem here in the cost to do a proper asset survey? You talked about Tom Winsor. There is some criticism of him for example that he paid too much attention to bearing down on questions of quality and service, understandably and properly, to the neglect of maintenance.
  (Mr Fletcher) I can only obviously speak in respect of water. First of all I absolutely accept what you said that regulators must not concentrate on one single part of the task to the exclusion of others. I do not think that is what we are doing in water. We are looking to ensure a proper balance and the last Periodic Review aimed to do just that between the need for a very substantial programme of investment, double the level of capital investment which existed before privatisation. It has been steadily doubled each year since privatisation. Mostly at the moment to deliver quality improvements, but those quality improvements, many of them with a primarily environmental goal, do in the course of their delivery also lead to an upgrading of the infrastructure. I absolutely accept capital maintenance must be looked at carefully and must be given proper investment. The debate is about what the proper level is. There I do accept that we have more work to do and I note the Committee's stricture that we have not got there yet.

Joan Walley

  43. May I press you a little more on that? When we were talking about the comparisons with the Rail Regulator and not having a situation where we have great big bursts of water coming up from burst water mains, my concern about the possible effects which could come about if we ignore this issue of asset maintenance and serviceability standards is a public health one. It concerns me that you have not mentioned that public health concern once, which brings me back to the importance of the precautionary principle. I should like to press you on this point and put it to you that if Ofwat has 11 serviceability standards which it has traditionally used, it is important that we now look to see how those serviceability standards could address concerns about public health arising from the condition that our pipes are in. I am also concerned because you mentioned many times the drinking water issues and we are very fortunate that the Government very early on had a water summit where all these things were brought to the fore and where pressure was subsequently put on the water industry and put on Ofwat. I do not see that because we have not had a sewage summit there has been the same concern about the standards of what is in the infrastructure when it comes to standards. When I think of a report whose name and title I cannot quite remember—I think it was done by Salford University—which on top of all of this set out ways in which there has not been the transparency about money which has been allocated to the water companies and the way in which they have actually carried out that work, I begin to have serious concerns that we cannot just wait for a little bit of work before the next review, but Ofwat really has to redirect its energies to look at the serviceability standards and change what has historically been done to public health concerns about the future. I really should like to press you and ask you what you are doing on those concerns.
  (Mr Fletcher) May I first take the public health issue? I imagine we would all accept that the primary concentration must be drinking water of the very highest quality. That is where the public health issue is most serious and that is where attention has been particularly concentrated and where I believe there is a very good record, learning admittedly from things which go wrong as we tend to do. When we turn to sewerage, and I accepted earlier that sewer flooding is at the very least an extremely unpleasant experience, with potential, if it is not dealt with promptly, public health concerns, the number of houses most at risk of flooding from sewers has halved since 1990.

  44. I am not just talking about flooding, I am talking about seepage.
  (Mr Fletcher) That is an indicator. It is no use saying the number at risk has halved to anyone who has sewage in their home. They have sewage in their home and it is awful. I accept that. I suspect the Salford University study was Dr Shaoul's study.

  45. Yes.
  (Dr Emery) Looking at public health I suppose the other area would be on pollution incidents and would be regulated by the Environment Agency, so that in fact both those areas are looked at quite closely. In terms of whether we are doing enough, since 1990 Ofwat has established the measures of serviceability, has pushed the companies very hard to get a sound basis for reporting those, has looked and pushed the companies to do drainage area studies, to do distribution drainage studies, so they understand what is happening in their systems. It was Ofwat who pushed the companies to do the asset surveys as part of the business plans in 1994 and again in 1997 and 1998. In a sense we have been following quite closely on these things and we are pushing the companies to try to utilise all the information we have to understand these things.

  46. I do not think it is enough.
  (Dr Emery) That is set in the context that the performance is improving. It is also set in the context of the Secretary of State taking the precautionary step in 1989 when he doubled, through the last Periodic Review, the level of maintenance of these systems on relatively limited data from the position in the 1980s. You had a step there which assumed there was a need to do a great deal more and since then we have been putting in place systems of monitoring the position and everything points to the fact that we are not backing off a cliff. In fact we are getting a handle on it and we are pushing the companies in the next few years to get a proper handle on the relationship between the activities they do and the service performance of their asset systems. That is the key to understanding where the future should lie, to maintain service for the next period.

Mrs Brinton

  47. I too am very very concerned about this, particularly following a visit we made as a Select Committee to one of the water companies.
  (Mr Fletcher) I believe you went to the North West.

  48. Yes, we did.
  (Mr Fletcher) Which of course needs to and does have a much higher level of capital maintenance investment that most other of the water and sewerage companies.

  49. The interesting thing about it is that we did not raise the sewage matter. They did. It then tended very much to dominate. I saw them separately afterwards in London and what they are saying about it is quite simply this. They do not have the money. I am not talking about patching up, because they are saying they could patch up. That will cost money as well but it would anyway only be a sewerage life of an extra 50 years. They are saying that unless there is radical money put into it what we are insisting on is a nineteenth century system of sewers. We are now in the twenty-first century, there needs to be not just patching up but new ones. That is going to take political will. It is also going to take much more pressure from Ofwat on Government to get Government to look at that than is going on at the moment.
  (Mr Fletcher) Just on the point about Victorian sewers, and here we are in a Victorian building, a lot of the Victorian sewers are in good condition because they were built to a very high standard and because they are in ground which allows them to continue to be in good condition. Back again to my answer to Mr Gerrard, age alone is not an indicator that replacement is needed. Condition alone, although it is important, and we want the companies to know the condition of their assets, is not enough in itself to say replacement is now needed rather than patching. Is it continuing to perform properly? Accepting the point that we need to look forward rather than backing off a cliff, is there every indication that it is going to go on performing properly? I suggest that ought to be the key indicator that we use in broad terms.

  50. You obviously did know that we had been to North West Water and I get a sense of "They would say that wouldn't they, because there are problems in that area?". May I tell you that there are also problems in Finchley? I was to shocked when I heard this. I had to phone my office and my assistant, who lives in Finchley, said yes, it happens in Finchley. The thing is, as you quite rightly said, that it is horrible if you have a situation where wherever you live in the country your house is flooded with sewage. This is not just happening to people once, one horror of a lifetime. For some people it is actually happening every two years. I think that has to be a public health risk.
  (Mr Fletcher) Yes and with the deluges we have been having, though it is the deluge which tends initially to cause the problem, there may well—as I guess a number of you know through your constituency bag—be particular problems which emerge. We are very conscious of that and the industry is very conscious of that. Clearing up is part of the job but it is only part of it. The level of investment, whether it is into specific sewer flooding issues or the much wider issue of capital maintenance generally, is something which is going to go on being debated. Trying to get an appropriate point—there is no one right level of investment—is going to be a debate where the industry and the regulator's concerns that we should not be spending more than is appropriate in terms of customer interest in keeping the bills down, are never going to reach an absolutely agreed position, but we do need to understand each other and yes, we need to go on working at this and that I accept.

  Chairman: It is a question of what method you use to reach this judgement that we are concerned about and that you previously seemed to rest too much on historic information.

Joan Walley

  51. And we feel that you ignore surveys and only look at output. You do not take account of the surveys which have been done.
  (Mr Fletcher) We do not allow asset condition to mesmerise us. However, asset condition is part of the picture which is why the companies and through the companies Ofwat need to know what the picture is.

Mr Gerrard

  52. How often has Ofwat told a company to spend more on asset maintenance than the company was actually proposing to spend?
  (Mr Fletcher) I would guess never.
  (Dr Emery) I am not aware of any time when in fact the bid that the company has put in has been exceeded by Ofwat allocation. That is not a surprise.

  53. Can you envisage a position where that should be happening, if you believe some proper assessment is being developed of condition, that you may say a company is not spending enough on asset maintenance?
  (Mr Fletcher) May I remind the Committee that it is always in the company's legitimate interests to maximise the capital programme approved by Ofwat within the Periodic Review, because of the way that then flows through into their turnover and eventually into their profit?


  54. But part of the game is for them to make savings on asset maintenance.
  (Mr Fletcher) But to have the highest possible figure accepted in the Periodic Review. I should be surprised if we ever got to the position where a company was so negligent of its shareholders' interests as to put to us a proposition which was less than the minimum they ought to be putting forward and to have Ofwat or other players drawing their ignorance or their inattention to their notice. That said, the underlying point you are making is that this is important and yes, we need to go on working at it.
  (Dr Emery) We identified three companies in the Periodic Review where the trends in the indicators and the surveys they carried out also supported that, that they might well need to increase the level of maintenance from the historical trend, particularly related to the sewerage cycle. So we increased the level of funding that we would assume for those three companies. Since then we have been at pains to go to those three companies to ask to see exactly what they are going to be doing to restore the trends in service performance of their systems such that by the time we come to 2002-03, before the next review, they will have restored the service performance for their networks. That has involved them looking very closely at integrating older information, defining the hot spots on their systems where there are problems, to bring together that data and to put forward plans to address areas where in fact, if they invest in those areas, together with other areas, they will have sustained or started to improve the performance. That is the approach we have been adopting. We are going out and we have been to see those three companies. Also part and parcel of our approach to this has been some discussions with the companies as to how they are tackling our MD161 economic appraisal and capital maintenance issues. We are in active dialogue with companies. Last week I was with North West Water to discuss with them how they were getting on and the tools they were developing. They recognised that the basis upon which they were forecasting future levels in 1999 was inadequate. It was essentially about dealing with improvements to the system, improvements to service, to get them up the league table in performance rather than maintenance levels as it stood. They are looking at that. We are actively looking with them. We are going to be trying to bring all these things together in what we think is best practice and what they are doing towards the middle of this year. This will link into the water industry work with UKWIR on capital maintenance where they are going to be identifying best practice in these areas. We think there is a good prospect of the decisions that the company has to make and the decisions the regulator has to make in 2004 will be much better informed than they are and were in 1999.
  (Mr Fletcher) And thereby much closer. We can only say that when we get much closer to 2004 and we are seeing how the strategic business plans of the companies match our expectations in the light of the further work which will have been done by then.

  55. So there are tools and best practices which are being developed. There are methodologies here.
  (Mr Fletcher) Absolutely. We are particularly talking about three studies. There is the work of the industry under the UKWIR banner, there is the work we are doing with the Drinking Water Inspectorate on the drinking water assets and the work we are beginning to get going with the Environment Agency on the sewerage assets.

  56. It would be very useful if you could let us have a short note on exactly what these tools and methodologies and best practices are. [3]
  (Mr Fletcher) We expect, as I said in my written evidence to the Committee, to have first results starting to emerge from the Drinking Water Inspectorate study really very soon. We hoped to have it by today but it has not quite come. We can provide the Committee with the usual very quick note, but look to go on providing the Committee with further updates as the situation develops.

  Chairman: That would be very useful. Thank you very much indeed.

Mr Chaytor

  57. May I move on to two quite specific issues which arose out of our enquiry, where we felt we had not quite got to the bottom of the issue? The first is the financial model and as I recall Mr Byatt in his evidence under questioning said that he had made the financial model available. Then it later emerged that it was the outline of the model which was available, but not necessarily the formulae and assumptions on which the calculations were to be made. What interested us was the question of transparency and why this degree of secrecy was felt necessary. May I just press you on this point? Why is there any need at all to keep anything secret? As long as Ofwat is holding information back, we are in the position we were with the debate over the market research. We had competing forms of market research and we had competing financial information and it was just impossible to get a common starting point between the regulator and the companies. My question is: what is to prevent you from making all aspects of the financial model available, putting it all in the public domain, being transparent?
  (Mr Fletcher) First of all, going back over old ground, what we did was to publish in October 1998 our rulebook and it included a full copy of the equations used in the model. What we did not make publicly available was the financial model encoded in the software. We did not pass the whole software out. The reasoning there was that the whole Periodic Review is designed to finish up with a figure, a package, not to have every particular detail crawled over. The worry was that the full publication of the model—every detail, every part, the full software—would lead to a rather misleading debate between Ofwat and the companies about, inevitably, the bits of the model that they did not like, leaving aside the things they liked or quietly thought were over generous to them. May I then move on to the future? As we develop a new model, and this is what we are doing, (as I said in my introductory remarks, which we need to do to give us greater flexibility to enable us to move faster as we come to the Periodic Review time and to exemplify more options,) I think we should be looking to develop it in a form where we can release the software to the industry. Because we are still at the very early stages of the project, we have not let the contract yet, I hesitate to give an absolute guarantee to the Committee this afternoon, but I am trying to come as close to it as I can.

  58. Can you think of any reason why you would not commit yourself?
  (Mr Fletcher) Subject to the reservation we have that it would tempt the companies to start wanting to crawl over every detail and of course it would inevitably be only those bits they did not like which they would raise with us. This could be an awful distraction in a period where a great deal of work has to be packed into a very short period of time to come up with the appropriate answers in the Periodic Review. That would be a reservation we would continue to have. The trade-off against sparing ourselves the criticism that we are too secretive, that we never share things, that we are not prepared to be open, we are not prepared to stand up and defend our practice, those arguments weigh more heavily with me.

  59. Picking up another point you mentioned earlier which was your discussion with your fellow regulators, can you tell us what happens with the other regulators?
  (Mr Fletcher) Again we are looking at the past. I believe what we have already been doing is a bit more transparent on the price setting arithmetic than Oftel have customarily been, a bit less than Ofgem, if I take them as the obvious exemplars. If David Edmonds and Callum McCarthy, my fellow regulators, are listening, I do not offer that as an absolute. I am not guaranteeing it.

3   See page 31. Back

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