Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of witnesses (Questions 40-59)

TUESDAY 30 JANUARY 2001

PHILIP FLETCHER AND FIONA PETHICK

  40. Can I just check something you said. You said that the deliberations of the Panel would be in confidence, or be confidential; presumably, once a decision had been made, any deliberations that had taken place in the Panel would become public?
  (Mr Fletcher) I think that would be very much an option. If we thought about the Monetary Policy Committee as some sort of precedent, you could conceive circumstances in which the deliberations remain confidential but the views expressed are part of the picture when the decision is announced, so that it is clear whether the regulator has agreed with his Panel or not.

  41. Do you have a view as to what sort of people you would want on the Panel?
  (Mr Fletcher) The people I have on the Regulatory Policy Committee now, and I have got room to expand it a bit, and intend to, I am still fairly new in the job, are a former banker, in fact, a very active banker but past normal retirement age, an engineer and an expert from the gas and electricity sector, who helps me by bringing in expertise from a different sector. I would want to build on that. I would not necessarily want to confuse the advice I get on environmental issues already, from bodies like English Nature, by having, for example, an environmentalist there, but I can see that that could be another option. My mind is very open to it.

Sir Paul Beresford

  42. As you possibly know, I like the idea that there is a point where the buck stops, and your idea of having a single individual, but some of the water companies might not agree. Your predecessor made a decision that was challenged by two of the water companies, went to the Competition Commission, they won their case, they were allowed costs but the costs were set against the customers of the water companies, or could perhaps have been set against the company and its shareholders; either way, it did not seem really fair, and it seemed as though the Ofwat arrangement ducked the issue. Can you see a way in which this could be set back, so that you would actually be responsible for your decision, if it was overturned?
  (Mr Fletcher) The money that finances my office and my salary comes from the water customer, and I am always very conscious of that, by levy on the industry. On the particular point, I think the Competition Commission, whether it agrees with the regulators or not, is an absolutely essential part of the system, holding the individual or board regulator to account. You have touched on a particular point, where I think something, frankly, went wrong, and where maybe this Water Bill could be helpful, which is that it should not be automatic that the costs of a Commission hearing flow straight through to the customer; in previous times, the shareholder has normally borne that cost.

  43. Why should either bear the cost, that is what I am really getting round to; because, if we take the previous evidence, the effect, if it goes on the shareholder, is quite disastrous on the investment in the company?
  (Mr Fletcher) That is obviously one of the things that has, in the past, deterred companies from going on from the regulator, not just in this sector but in others, to the Competition Commission, on a price appeal.

  44. So you do not have an answer?
  (Mr Fletcher) The option, if it is not the customer, if it is not the shareholder, is the taxpayer. Now whether Parliament would actually want that is obviously for you.

  Mrs Dunwoody: Only in Sir Paul's concerns.

Sir Paul Beresford

  45. Not necessarily; the thought of the PAC looking over you warms my heart.
  (Mr Fletcher) Personal surcharge is something—

  46. I have not got back to that area yet.
  (Mr Fletcher) Is something every accounting officer is aware of, and it is normally when something, as you know, very bad goes wrong, not a misjudgment but out and out corruption, or whatever.

  Sir Paul Beresford: No, I was not accusing you of that, I know you too well.

Mr Brake

  47. Mr Fletcher, can I ask you to comment or to explain why in your evidence you feel that the proposal to give the Secretary of State and the National Assembly for Wales powers to set standards of service inevitably increases uncertainty for companies?
  (Mr Fletcher) This is going back to Dr Helm's points. Uncertainty would be about what the Government was going to do, what Ministers were going to do. If they were going to impose further and tougher standards than—let us take leakage as an example. We seek to regulate by reference to what we call the economic level of leakage, that is the level to which the company should be reducing leakage, to optimise the overall cost as between the cost of repair, on the one hand, and the cost of the loss of the water, on the other. Now Ministers might want to take a different view, they might say, "We want much more severe standards than that," for which there would be a cost. Now that cost would flow through the regulatory price regime to the customer; so far, I think, that is automatic. The bit that is less clear is whether the uncertainty about the possibility of Ministers setting a much more severe standard would tend to raise the cost of capital to the companies, which, as Dr Helm said, is hugely important, £50 billion worth of investment since privatisation, through to 2005, and the clear evidence from the City is that it would, because the uncertainty increases the cost of capital and flows through eventually to the customer.

  48. Are you saying there are no circumstances in which the Secretary of State should be able to set standards of service?
  (Mr Fletcher) No, I am not saying that; but I think the Secretary of State can get an awful lot of what he wants through the powers that he has already got. For example, again, the environmental and water quality elements of the programme are not a matter of the regulator saying, "This is what it should be;" in effect, the investment in the environmental and water quality elements of the programme is decided by Ministers and taken into account by the regulator after dialogue. And we saw examples of that in the last round: a vast programme, but on some issues the regulator said, "I don't think this one has really proved itself yet; oh, Minister, back to you, please, and the Environment Agency, to have another look at it." And some of those are now starting to flow through, sometimes at significantly reduced cost to the original proposal.

Chairman

  49. But what you are actually saying is that you should not put in this legislation something that really is repeating the powers that the Minister has already got?
  (Mr Fletcher) I would suggest that the legislation should not be passed if it is just, "Oh, well, it would be nice to have this in reserve, just in case." I could draw to the Committee's attention analysts' reports, which I do read, but I am not suggesting that we all need to pay huge attention to every jot of it, but which do bring out the point that the mere taking of a power, which would then enable Governments to set standards by regulation, without primary legislation, is something that the City reflects on, and tends to charge a high cost of capital as a consequence.

  50. Do you think the City really reflects on it, or is it not the case that these analysts want to prove that they have done something for the £600 or £700 that they charge for their views?
  (Mr Fletcher) I do not know that I want to offer a view, Chair, on this one. They vary in quality, and some of them are very good, and I do read them avidly, as part of my job, as I read all sorts of other things.

Mr Benn

  51. Since the power to disconnect consumers was removed, water clearly has been given a particular status, it is an essential supply. Do you think, therefore, that the charging structure is progressive, in other words, relates to customers' ability to pay, and I am thinking particularly of families on low incomes?
  (Mr Fletcher) Very broadly, yes. The rateable value basis of charging, for the great majority, still some 80 per cent, of domestic customers, has an admittedly crude but broad correlation with ability to pay, low rateable value tends to mean, as you know, low income, low affordability. Then, on top of that, there are the provisions that the Government has put in place, and which it is due to review this year, to apply particular assistance to customers on low income, and there is, of course, the rebalancing that happens within the tariff, from some customers to others, which tends to have the same effect. I look at the charging schemes for each company, each year, and have a dialogue with them about that, and I think that the ability to pay is very much part of that dialogue.

  52. And how about applying those principles in relation to metered supply?
  (Mr Fletcher) For metered supply, the provisions in the regulations, which are now in effect, do provide some help for those particular customers on benefits. They are not comprehensive, but there is specific help. This will be part of the review which the Government has undertaken to do this year, of how those regulations are operating.

  53. I understand that some help is provided, but some would argue that that is not sufficient?
  (Mr Fletcher) There is always room for debate about where you draw a line in relation to a benefit, in this case a reduction in your water bill, and whether there are not deserving cases, as there almost always are, that lie just beyond the boundary that you have drawn. So, for example, in this year, I am looking to move the boundary out, in respect of those who have medical conditions which require them to use a lot of water, to make it a bit more extensive than it was last year. And that is the sort of debate, that just needs to go on, where you will never get it exactly right and you need to watch it; at the same time, if you push it too far out, then you deny the possibility of taking forward competition in the water industry which, potentially, at least, and in the sort of way that Dr Helm was outlining, I think, offers support and help for all customers, by pushing for more efficiency across the industry. So, again, a balance has to be drawn.

  54. Should your post have a responsibility for sustainable development? Your predecessor did not appear to think that was a terribly good idea; do you?
  (Mr Fletcher) My first thought, which is in my evidence to the Environmental Audit Committee, on their recent report, is, no, it should not, for much the reason that Dr Helm gave. Again, I am concerned that the regulator, the economic regulator, in this case, an unelected official, appointed under an Act, should have very clear duties, that it should not be too woolly. And the Secretary of State, and it is expanded in the draft Water Bill, would have power to give me guidance on social and environmental issues; he already has a power, this is reinforcing it. My second thought is, on looking at the sustainable development duty, for example, that Parliament has recently passed into law in relation to Regional Development Agencies, that maybe that would be all right. It is the sort of thing I would like to go on thinking about, we are still at an early stage in the debate.

  55. As I understand, one of the arguments that the water industry puts is, because different people can take different decisions that impact upon their business, this raises the risk versus the cost of capital. Do you think that the structure that is being proposed does as much as could be done to try to address that issue, is it one that needs to be addressed?
  (Mr Fletcher) Within the Water Bill itself; this is where the gaps are particularly frustrating. If we look, for example, at the abstraction regime, which has been developing over a long time, where I fully agree there needs to be further clarity about how it is to be done, we have got two big gaps. First of all, the Government has still to announce its decision on economic instruments, which could be a very important part of how the abstraction regime works; and, secondly, its decisions around competition, which needs to interact with the abstraction regime. Dealing with the ultimate supply, it has got to be correlated with control on environmental grounds.

  56. So we really need to see how the competition proposals are going to work, in order to make a proper judgement?
  (Mr Fletcher) I think it will be very hard to judge the Bill overall until we can see it as a whole, and I do not think the Government has made any pretence of the fact that at the moment this is a contribution towards the Water Bill, not a complete picture.

Chairman

  57. What about abstraction; what should be done about it?
  (Mr Fletcher) I am not competent, Chairman, to offer a view simply from the environmental end, so I will not try to do that. I would say, the controls on abstraction are solely about the very important, and I do not underestimate it, the very important business of ensuring that water is used wisely, that we have adequate resources to recharge low-flow rivers, and so on. The bit that concerns me is to try to introduce elements that ensure that, when judgements are taken about abstraction, the reinforcement of competition is an important part of the picture, as well as, if you like, the command and control element, which is very clearly there in the Bill at the moment, on environmental grounds.

Mrs Dunwoody

  58. What does that mean, exactly, Mr Fletcher?
  (Mr Fletcher) At the moment, the Environment Agency is looking, as I understand it, to regulate abstraction—

  59. No; when you say, very specifically, that competition must be one of the elements, what does that mean?
  (Mr Fletcher) If we break competition into three elements, the supply, the distribution and then the retail, the first crucial element is supply, there is already the possibility of new entrants coming into water, with a supply which they have access to. And one of the issues I have raised in my response to the Bill is the possibility of giving the economic regulator the power to ask a water company to seek a bulk supply, which could be both environmentally and economically better than leaving the water company, within its regional boundaries, to say, "No, I wont take water from a new entrant, I'm going to hang onto my own water supplies, even though they cost more, even though they're more environmentally damaging."


 
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