Examination of Witness(Questions 20-39)|
WEDNESDAY 29 JANUARY 2003
20. Thank you. The second thing is, when you
were appointed were you just appointed or was there a panel, were
(Sir Ian Byatt) Yes, there were.
21. What happened? Was it a miracle?
(Sir Ian Byatt) No. I have applied for
all the jobs I have had over the last twenty-five years and I
applied for one job in the Treasury. Yes, I applied for the job.
It was publicly advertised. You go and talk to the headhunters
and they grill you. Then you go and talk to the department and
they grill you and then Nicholas Ridley and Michael Howard grilled
me. Then you go away and they then decided that I was going to
be appointed. It was, if you like, in the pre-Nolan days; I gather
that things are now somewhat different. But it was open all right.
Lord Acton: I am sure it was. I just wanted to know.
22. Two quick questions of detail, if I may.
You have described the various interest groups and so on that
you had consultations with in the course of your work. I was wondering
whether you had consultations with the trade unions on any particular
aspect? The other question is whether devolution has had any effect
on your work?
(Sir Ian Byatt) I had no formal contact
with the trade unions, although I did go and address a meeting
of trade unionists, who were very kind to give me afterwards a
bottle of whisky, which, they hastened to say, was made from public
sector water in Scotland! Sorry, the second was?
23. That is all you are going to say about trade
unions, is it?
(Sir Ian Byatt) That is all I am going
to say about trade unions! I had no formal consultation.
24. Does that not seem to you rather inadequate,
a bottle of water from Scotland?
(Sir Ian Byatt) A bottle of whisky from
Scotland made from public sector water.
25. Whatever the contents of the bottle it sounds
to me a rather minimal contact with those who worked in the industry.
(Sir Ian Byatt) My contact with management
in the industry was very considerable. I believe that a regulator
is not there to manage but that a regulator is there to regulate
and I do not think it would have been particularly proper of me
to get involved. I certainly did not want to get involved in matters
of management and I do not believe that my statutory duties led
me therefore into those kind of consultations.
26. Thank you. That is an interesting answer.
(Sir Ian Byatt) Devolution, yes, of
course things changed with the Welsh Assembly and rather than
having had contact with the Secretary of State for Wales, which
I did in the old days, I had contact with the Welsh Assembly.
On one occasion I addressed the Welsh Assembly on the question
of the takeover of Hyder, the Welsh company, then by Nomura Principal
Capital Finance, whatever they were called.
Lord Morgan: Thank you.
Lord Holme of Cheltenham
27. Sir Ian, could I scratch the same itch as
Lord MacGregor and just pursue this question of Parliamentary
accountability within the panoply of various accountabilities
you have talked about. If I could direct you to point 11 of your
very helpful paper, where you say: "The views of the public
influenced the balance between water quality and environmental
obligations and prices paid." Clearly all the time in every
way you are trying to make trade-offs on those issues. If water
had remained publicly owned those three goods are the sort of
things that there would have been endless political debate in
this place and another place, political pressures of one sort
or another on ministers, but the industry was privatised in an
interesting way because it is a way that did not produce competition
so it was a privatised monopoly. In a privatised monopoly it is
probably not adequate to say that the market will secure the trade-off
between those various goods. In a competitive industry you might
well take the view that the market would resolve the trade-off
between environmental goods, clean water and low prices but you
had to play that role. It is a long way round of saying this is
a subject, of course, since they are public goods, on which MPs
will continue to have views. I understand the relation to ministers
but thinking of Parliament, qua Parliament, just to follow
Lord MacGregor, would it have helped you to have a utilities committee
where the necessarily somewhat random views of legislators could
be focussed and brought to bear on your industry or do you perhaps
not think, as some people have said, that Parliament should be
the apex of accountability? Do you think it is enough, as an ex-Treasury
man, for it to be primarily the executive and ministers to whom
you are responsible? In a sense your thesis, which I just want
to question, is that you do direct market research for the public
so you keep in touch with them, you have consumers panels and
you keep in touch with the public that way, there are ministers
and shadow ministers with whom you have liaison but that is the
executive and shadow executive. What about Parliament itself representing
the views of the balance of these public goods and had the industry
not been privatised what would have been matters of public policy?
How do you see your relationship with Parliament?
(Sir Ian Byatt) Let me try and answer
that. Of course I knew that there were debates going on at the
ministerial level, for example about the question of quality.
Under both Conservative and Labour Governments I know there were
quite important discussions about how far the environmental agenda
should be pushed and what effect it would have on prices and in
some ways I think that debate was even more acute in the privatised
days than it had been in the old nationalised days, but that was
not for me to engage in. I was there to help that debate but I
knew it was happening. As far as Parliament is concerned, I think
one of the difficulties for regulators is that the Parliamentary
committee system in the Commons is very much marking individual
departments. So if I was examined by the Environment Committee
they are interested in the environment and of course they thought
it was worth paying for. I was very heavily criticised by one
of the Environment Committees for daring to suggest that the customers
might not like the cost of their recommendations and they thought
it was quite improper for me even to begin to say these things.
So there was not a body other than the Public Accounts Committee
and the Public Accounts Committee had hearings on the role of
the regulators and what we were doing. There were quite big hearings
in the early days and that was quite helpful because it really
concentrated one's mind on what one was doing. Later hearings
by the Public Accounts Committee were on particular issues like
the setting of performance standards and the millennium bug, the
computer bug Y2K, where computers would not work once we got into
the new millennium. So there was no regular Parliamentary checking
of what the office was doing as a whole and I think that could
be a lacuna in the Parliamentary arrangements.
28. Just a quick supplementary question. Would
it, for example, have helped or hindered you if there had been
at regular intervals a debate on a report that you laid before
Parliament on the water industry and its regulation? Would that
have been helpful or unhelpful?
(Sir Ian Byatt) It depends on the nature
of the debate, of course, and whether it would be in the full
House or not, I do not know. But we did of course do a report
each year and that was presented to Parliament and I presented
it to the press. I could not present it to Parliament, although
I would have been very happy to present it to Parliament if Parliament
had wished me to. I found that Parliamentthe House of Commons,
of course, I speak ofwas very ready to hold the executive
to account and the spirit of Charles I, which is very important,
is fine but sometimes there are other elements as well. So I,
for example, took an initiative in 1999 when I published my draft
price limits and I said there was an all-party water committee,
which actually was quite helpful but it was not part of the formal
set-up. Helen Jackson had started it up and did that very well
and we had quite good debates within that. But I would have said,
"Shall I present my price limits?" "Oh, yes, that
will be fine." How many Members of Parliament turned up?
Three of them. So I felt that I was trying to involve Parliament
and we did have a Parliamentary officer and Ingrid Olsen, who
is behind me and who is still working for OFWAT, is there to help
Members of Parliament with the work of OFWAT, but we did not get
quite the response we might have hoped. So while lots of good
things came out of Parliament, I have some disappointments.
Lord Holme of Cheltenham: Thank you very much.
Lord Jauncey of Tullichettle
29. Sir Ian, the director-general of water services
is a creature of statute, is that not right? He has no powers
or duties other than those which are conferred upon him by the
(Sir Ian Byatt) Correct.
30. You mentioned that one of your duties was,
I think, to see that the water companies were carrying out their
(Sir Ian Byatt) Yes.
31. Supposing you had taken the view in a particular
case that a water company was not doing what it ought to be doing,
possibly it was not supplying an adequate quantity of water when
it was in a position so to do or perhaps it was not supplying
water of an appropriate quality where it had been agreed what
that quality should be. Was there anything you could do about
it? Did you have power to fine or would you take the matter to
the minister or what would you have done in such a situation?
(Sir Ian Byatt) If it had been a matter
of the quality of water there is a drinking water inspector and
the drinking water inspector is in a position to fine the water
companies for not delivering water of the correct standard. If
it is a question of supply, the case did in fact arise or almost
arose in Yorkshire in 1995 because Yorkshire Water almost ran
out of water and I held an inquiry into why that had been and
the main reasons were that they had got a high level of background
leakage in that area but they also had not completed their water
grid properly so that the water could run downhill but they could
not pump it uphill and then had to take it up by tanker. Also
there were other levels of service obligations which they were
not meeting properly. So I said: "You will from henceforth
operate under lower price limits", which cost the company
about £40 million, "You will put all these things right
at the expense of the shareholders." They did that. Of course
the management changed in the process of this. So we certainly
had and used the power to deal with a water company which was
not properly carrying out its functions. I should say that there
is an appeal body, what used to be the Monopolies and Mergers
Commission, now the Competition Commission, and I should have
mentioned that because that is an important part of the accountability,
that I can be appealed against, and that is very necessary.
32. A decision of yours can go to the old Monopolies
(Sir Ian Byatt) No, formally if a water
company wishes to be referred I cannot stop them being referred,
so essentially the decision is theirs.
33. But I suppose in theory you could be judicially
(Sir Ian Byatt) I have indeed been judicially
(Sir Ian Byatt) No. This was on the
question of what we call budget payment units, which in the electricity
world were pre-payment meters but they were not for meters because
they are on a rateable value charge, and there was an issue about
whether the disconnections code (by which the water company had
to go through certain processes before disconnecting them for
non-payment) applied when people did not swipe their card, it
was almost self-disconnection. In fact the customers rather liked
this and so I fought that case quite hard but I have to say I
lost and it seemed to me entirely appropriate that there should
be a process of judicial review so that regulators cannot just
trample over things.
35. I have three short unrelated questions.
The first one is that I was fascinated to hear that when the drought
became serious and it became clear that suppliers had a statutory
exemption from penalties for failing to supply water you persuaded
them to give that up. How?
(Sir Ian Byatt) I am not sure I can
really answer that question terribly well. Ministers had said
they would legislate on the matter and you exercise such authority
as you have on these occasions. It was quite clear what the customers
wanted and so I believed I had, if you like, the power of the
public behind me. They did not have to agree to the licence change.
They could have gone to the Monopolies Commission on the licence
change and said it was an entirely inappropriate one but they
chose to agree to it. That was a perfectly proper procedure. I
was not twisting their arms or anything like that but I was explaining
to them that they did have duties and that if they failed on those
duties people should be compensated because if you do not get
the water I believe you should be compensated. You are paying
for a commodity you are not getting. But also it is a pretty good
disincentive to your teams working in the company if, as a result
of them making mistakes, the shareholders have to pay out a lot
36. Thank you. That is very illuminating. Secondly,
you have said that you did on occasion consult with other utilities
regulators. Did you gain from those consultations any common perceptions
which you feel applied to all regulators in the utilities?
(Sir Ian Byatt) It is always very helpful
to discuss these things with people so I think, yes, we learned
a lot from each other about how to deal with governments, how
to carry out our jobs, the kind of process to use. The process
of consultation is extremely important. There is nothing in the
legislation ever about process but process matters a great deal
and we were all working out processes for involving people and
having proper transparent systems so it was very helpful to talk
about those things. It was also helpful to talk about technical
matters so that, for example, when Callum McCarthy and I were
doing a review in 1999, he on electricity distribution and me
on water, our staff talked about the appropriate numbers for the
cost of capital based on talking to the city and talking to the
37. So there is a community of regulators there
already in existence?
(Sir Ian Byatt) Indeed there is. I believe
there is still a working party looking at the way regulatory accounts
should be done and that seems to me very helpful.
38. Thank you. Finally, your last point in your
background paper says that the independence of regulators could
be compromised if ministers were to make improper (i.e. extra-legal)
use of their political strength. I just wondered why you put that
(Sir Ian Byatt) Because ministers are
very important people and they are very powerful people and they
believe they want to get things done and there is always the temptation
to try and push things a bit hard and I think part of the point
of the legal framework of regulation is that there are people
who have statutory duties which cannot be overturned. So it is
part of, dare I say it, defence against conceivable arbitrary
government. It is not for me to give you instances of possible
39. Does it follow that a closer or more effective
relationship with Parliament than that which has so far been offered
would be a protection?
(Sir Ian Byatt) Possibly. I would have
to go away and think about it.
Lord Elton: Yes, quite. Thank you.