Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 311-319)




  311. Dr Elphick, Mr Boudier and Mr Weeden, welcome. Before we get under way, could I invite you to introduce yourselves, for the record, saying who you are and your positions?

  (Mr Boudier) Thank you. Good afternoon. I am Jim Boudier, Finance and Regulation Director at Thames Water, also I chair the Water UK's Regulation Group, and have been associated with regulation for quite some time. Clive Elphick is Strategic Planning Director of United Utilities, and Robert Weeden is Economic Advisor to Water UK.

  312. Thank you very much. Thank you for being with us this afternoon, and thank you all also for the paper that you have put in to us, it raises some very interesting points. Before we put questions based on that, are there any points you would like to put to us, before we get underway?
  (Mr Boudier) I think, just the general point that we regard this as a very critical issue, and very tricky, in terms of trying to strike the right balance, and I think that is one of the areas you want to talk about this afternoon.

  313. Thank you very much for putting that responsibility on our shoulders; we shall try to acquit ourselves. If I could pick up on some of the recommendations and points you make in your paper, and perhaps relate it as well to the evidence you have just heard, because I think there is a clear overlap between a number of the recommendations you make and those that were put to us by British Energy. Now one of the points you make, and indeed it was put over to us by our previous witnesses, was the point about appeals. In your paper, you stress, at paragraph 12, the need for a stronger appeals process, and then, at paragraph 33, you say: "Appeal rights throughout water legislation are unsatisfactory and should be improved." Could you give us some idea of the way in which you think they should be improved?
  (Mr Boudier) Yes, certainly. We have done a piece of work with Norton Rose and engaging other utilities, and perhaps I will ask Robert to say just a few words about the recommendations contained therein.
  (Mr Weeden) As you will recall, the BRTF report on the economic regulators recommended further work on appeals, and following that we got together with the Electricity Association and Lattice Group and we did this piece of work, by Oxera and Norton Rose, we commissioned this report from them, which was published last autumn, and we held a conference around that, and we have discussed it extensively with a number of stakeholders. Also, we have managed to persuade Opposition Peers to put down amendments to the Water Bill, which is going through the House at the moment, a number of which actually were discussed yesterday in Grand Committee. The report came out with seven conclusions, or recommendations, which essentially we have issued for consultation and turned into the amendments to the Water Bill. I will not go through each of the seven, but if I might identify just three important ones. The first is the one mentioned here, streamlining appeals to the Competition Commission. When a company has gone through a price review, is objecting to the price limit set in that review and then appeals to the Competition Commission, we feel that, generally speaking, there are only a few points at dispute, possibly up to half a dozen, very often. However, the Competition Commission has to go through a full redetermination for that company, which takes an enormous amount of time and effort, and we have suggested, through the report recommendation, that the Competition Commission should have the option to streamline that process. It should simply, if it wishes, just look at those points of dispute. That recommendation has been criticised, on the grounds of cherry-picking. If you recall, the Government's response to the BRTF says that cherry-picking is our main concern, and that is why we are going to keep this whole issue under review, but we're not going to take a view on it now. We think it should be up to the Competition Commission to decide whether there is cherry-picking or not, and therefore the amendment we proposed uses the word "may" rather than "shall" or "have to". The second issue, which is very important, is that we think basically the aim here is to improve decision-making ex ante, in other words, give incentives to regulators to do things properly, right up front. And one way to do that is to get the methodology that is used in a price review sorted out right at the beginning. If the company objects to the methodology, it has to wait right to the end of the process and then object through its appeal to the Competition Commission; and so, again, through the recommendation of the report, we have taken the view that if a company is concerned, well, firstly, the regulator should publish the methodologies it proposes to use in a price review in advance, which is what, in fact, Ofwat have just done for the 2004 price review, in a long, 140-page report, with, I think, 57 different varieties of methodology. If a company is concerned with points of methodology in that report, it should have the opportunity of taking that to the Competition Commission and having it reviewed by some panel or other, formed by that Commission, which would work within, obviously, a strict time limit, because, obviously, the price review process is quite complicated and needs to be dealt with properly. And the third issue is appeal rights generally, which you have just referred to, My Lord Chairman. There are a number of areas in the water legislation where there are problems; one is that sometimes there is not the availability of appeal to an independent person. Secondly, there is not the availability of appeal on the merits of the case, the whole judicial review issue that was discussed a moment ago. And, thirdly, I am sorry, I have forgotten the point, so I will stop there.

  314. That is fine, that covers it quite substantially. So, clearly, this derives from not just the point of principle, that clearly there is a principled case to be made for, if you like, allowing greater equity in the process, but is it born of practical difficulties that have arisen, in other words, how much of a difference will it make to you if the changes you propose actually are implemented?
  (Mr Weeden) We felt that there were a lot of problems with the 1999 price review, which is where a number of these recommendations have come from, and the new regulator who has come in, Philip Fletcher, has made significant improvements, so arguably things may be much better this time, but we have not gone through the full next review so we do not know yet the answer on that one. What we would like to see is something that is established in statute, so that all regulators, all future regulators, have the incentive to get things right, and it is not just the pressure we are putting on the current regulator that bears fruit.
  (Dr Elphick) My Lord Chairman, if I could add to that, to provide an example. At the moment, the Competition Commission we regard as our principal appeal body, and the principal issue for us, as a regulated monopoly, is the price levels, and all you can appeal on at the moment is the whole package, and it is entirely quantitative. So you could disagree completely with the way in which one very important issue was being dealt with, in the way, for example, that the Environmental Audit Committee was really rather critical of the way in which Ofwat had dealt with the maintenance of the water industry and its networks in the UK, but you have got no opportunity at the moment to challenge that methodological point without disagreeing with the results of the package. In some ways, it might be almost less contentious, because when it is quantitative the regulator is saying it is 2 per cent and we are saying it is 4 per cent, or whatever it might be, whereas it would not have to be about numbers, it could be about an important issue where there is a difference of view as to what the appropriate methodology should be, and that would be seen to be quite a useful thing for either the Competition Commission or some committee of it to be able to deal with.

Chairman: Thank you very much.

Lord Elton

  315. How important to you are regulatory impact assessments?
  (Dr Elphick) I think they are important, but they are fairly new to government departments, and newer still to the regulatory bodies. We think they have got a great deal of potential. The acid test for me, I think, is what are they used for; are they used in advance to inform a policy decision, or are they used, in effect, after a policy decision has been taken to justify it. And, clearly, what should be the case is that the regulator, or indeed the government department, is using regulatory impact assessment to help it decide what to do, to do a thorough cost/benefit analysis, and so forth. Now we accept that, as British Energy did, in many cases, it may be quite difficult, but, nevertheless, it would be a very good discipline, and even if it cannot be done perfectly it will be better done imperfectly than not at all.

  316. And how would you improve them? I think the answer probably is implicit in what you have just said; but you suggested that one of the things you want is better regulatory impact assessment of proposed changes. So really you are saying, this is on record, make it before the decision, and not after it, is that right?
  (Mr Weeden) Yes, that is correct. It should inform a decision, not come after it. It should have the full cost/benefit assessment in it, it should have a wide range of options which are all looked at properly.

  317. Are you saying that the impact assessments hitherto, such as there have been, have been made after the decision and not before?
  (Mr Weeden) We do have a lot of concerns with the various impact assessments, with government's impact assessments not so much with those prepared by the regulator.

  318. That was not my question. I am asking whether they were used, as was suggested, as a justification ex post facto that, or whether they were in some other way defective, from your point of view?
  (Mr Weeden) They are seen mostly to be ex post justifications, yes.

  319. Thank you. On a different question, you tell us, at paragraph 18, that "Ofwat's own review of its price review in 1999 was unsatisfactory and should not be repeated." Would you like to expand on that?
  (Mr Weeden) We think that evaluations after the event should be undertaken by an independent person. Clearly, Ofwat were party to doing their own price review and then were saying, what they actually said in the review was, that stakeholders other than the water companies were very happy with the way it was conducted, but the water companies griped about it. That, I think, was a slightly biased view of what actually happened.

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2003