Select Committee on Constitution Minutes of Evidence


Examination of Witness (Questions 580-596)

WEDNESDAY 11 JUNE 2003

MR PHILIP FLETCHER, OFWAT

  580. They laid that before us as a committee?

   (Mr Fletcher) It was included in their evidence.

  581. Oh, yes, I know about that. Yes.

   (Mr Fletcher) You, if I may say so, are a rather eminent part of the court of public opinion and this is something which could be taken forward. The press, a long way behind Parliament, are a key part of the accountability of the regulator—the press and the media at large. If I am trying to convey messages to all the various interests, then it is to the press I turn. Their views on what I am doing are obviously not going to sway me from taking what I think is the right way forward but the press is crucial to managing what is a difficult, complex and, to a degree, collegiate process. It will not work if it is only Ofwat trying to do something or only the companies; it needs to be a whole set of stakeholders, including the elected government of the day, more or less agreeing to a common core on the way forward, otherwise it will not work, quite frankly.

  582. Can I try and understand, first of all in the instance you gave, and I have not followed up what happened since, if WaterVoice did win? Have you conceded?

   (Mr Fletcher) No, I have not.

  583. I want to know about when they have won.

   (Mr Fletcher) I have amended the licences of the companies. In this case, as far as the City and the companies are concerned, they have welcomed this as something that helps to lower their cost of capital, which of course, in the end, is for the benefit of customers. They grumbled, and they did not like what I had done, or certainly did not like entirely the manner in which I had done it. I shall reflect on that on future occasions, but I have done it and I still do not feel very repentant on the main elements there.

  584. I understand that. I would like some examples of where WaterVoice triumphed.

   (Mr Fletcher) My pause is probably eloquent! The sort of way in which we have developed the relationship, both in private and in public, has not by any means been just me as the regulator formally, and not least to Parliament, accountable for WaterVoice because of the current statutory set-up; it has been a mutual and a joint operation and so the memorandum of understanding was very much worked out between us. In fact, we worked off a draft which was initiated by WaterVoice committees. I have accepted that it is very sensible that I should have a session with the WaterVoice Council at its quarterly public meetings. I make that as near as I possibly can something that I do not miss. At such sessions, I am very ready to be asked about any part of my job. That was WaterVoice's suggestion, which I entirely accept as the appropriate way for the  regulator to behave towards the customer representatives. I also make sure I visit every one of 10 WaterVoice regional committees at least once a year, and that is the aim, and have several sessions often, but particularly one each year on performance and mutual review, both ways, with the chairmen of committees, so that we can see how well we are doing. That may have to fall when WaterVoice is a truly independent body, but for the moment it is quite a valuable cement to ensure we understand each other without ever being in each other's pockets.

Lord Jauncey of Tullichettle

  585. I would like to ask about three matters. First of all, do you think that there would be advantage in giving greater rights of appeal against your decisions? Am I right in thinking at the moment of course you are an industry where there is not much in the way of competitive supply of water, if any, so the Competition Commission does not really enter into the matter? Your decision can always be judicially reviewed, of course, but that is very in extremis. I would like to have your views on whether some form of appeal on the merits of your decisions would be desirable. Various people have expressed their views but that is a general matter. Secondly, I gather that in the new Water Bill there is going to be a set-up called a customer council, CCW.

   (Mr Fletcher) This is the new WaterVoice.

  586. It is a consumer council. Is that going to displace the work of WaterVoice or is this simply going to be another organisation with an interest from the customer department? Is there much for this body to do? I gather that you will not be obliged to consult it, as the Bill presently stands, in reaching your decision and that it will not have the power to demand information which it needs. That is the second matter. The third matter is this. Apart from the statutory constraints which are imposed on you in relation to your powers and duties, and guidance provided by Ministers, have you been lent upon by Ministers in your decision-making process to an extent which you felt is inappropriate, given your independence?

   (Mr Fletcher) Would you mind if I worked my way up in reverse order?

  587. Of course you can do that.

   (Mr Fletcher) Have I ever been leant upon inappropriately by Ministers? No. I am absolutely clear about that. Can I perhaps give an example of where I thought that the relationship worked appropriately? This was the takeover for Welsh Water by a company limited by guarantee, so an unusual company. It came before Network Rail, entirely debt-financed and with no conventional equity. The Welsh Assembly Government had only recently been set up; this was in the year 2000. It was my job at least to express a strong view. I do not know whether it could have gone ahead if I had been strongly opposed to it, but I think it is at least a strong possibility if I, as regulator, had said, "I reckon this sort of set-up is just too dangerous and it should not happen". I weighed all the issues and took counsel, not in the formal legal sense but I took advice from a wide variety of people, and that included the Welsh Assembly Government. The Welsh Assembly Government in the First Minister took, I thought, an entirely proper view that it was for me to take the decision on whether this particular animal should go ahead. It was for me to decide whether customers' interests were appropriately protected within it. He offered, I thought entirely properly, the view that it would, all other things being equal, be nice to have Welsh Water owned by Welsh-based companies, which this would achieve. I do not think I gave that undue weight but it was significant. The UK Government was at the same time expressing concerns about this particular form of beast, for very good reasons which I shared: is this a stable entity long-term going forward? Remember the problems about the old mutuals, the building society form that was perhaps just a bit too comfortable? They properly and privately first, expressed these concerns. When I had taken my decision and announced that the company should go ahead, in a very low-key way and exchanging texts so each knew what we were going to say before it happened, they said, "It is the regulator's decision; he is independent. We are concerned about this particular form of structure". Michael Meacher at the time made that statement. I thought that was a proper resolution of these difficult roles that we each have to play in this sort of case. That is the most extreme case of which I can think. There has been nothing approaching it since then. I talk regularly to Ministers, usually in the Environment Department but it can include DTI Ministers, Treasury Ministers as appropriate, and officials. In having those conversations, both of us recognise the role and the discussions about ensuring each plays our respective roles properly. Again, I think that is part of the system and it is appropriate. The second element was WaterVoice and the new Consumer Council. It will take over entirely from the present WaterVoice. As I say, I rather hope that the name, now becoming established in public consciousness, does not disappear. It will be a new set-up. It will undoubtedly have a new Chairman because the present Chairman of the WaterVoice Council says he does not want to go on beyond the new set-up. He will be appointed by Ministers rather than by me. My hope is that it will build on the relationship that has been established and that it certainly will not try and do things in an entirely fresh way, and certainly that it will not see it as its job, its emblem of machismo, just to pour heaps of coals of fire over the regulator's head, but that it will think before it does so and seek to persuade. Then, if we are going to have a public debate, we will have a proper public debate around the issues.

  588. Do you see any advantage, other than window-dressing?

   (Mr Fletcher) It is like my own post, which under the Water Bill will be succeeded by the Water Services Regulation Authority. I hope again it will still be called Ofwat because I think people would be very puzzled otherwise. I think there are advantages in an individual Director General. The whole business of de-personalisation, as Callum McCarthy has already said to you, I think swings the balance in favour of having boards. I have already got as near to it as I can by establishing a board around me with non-executive and executive directors that I believe are reinforcing and improving our decision-taking ability.

  589. Does that apply to this new Consumer Council for Water?

   (Mr Fletcher) I think it helps to clarify that they are not simply part of Ofwat. I think WaterVoice was in danger of just being seen as the regulator's poodle, not a true, independent champion of customer interests. I hope we have dealt with that already, but it will be reinforce when WaterVoice, the new consumer council, is not beholden to me as regulator at all and does its own thing. Your third question was on appeals. In various discussions at which I have  been, I have heard various definitions of accountability. I have no doubt that your Committee is thinking hard about those. One is that I invite you to think about the power to sack the regulator. It is quite an important part of accountability. I can only be sacked basically if I am mad or bad. I think that is an absolute key protection for the regulator. Another of the definitions is the power to overturn the decisions which I take. On that, both the courts and the Competition Commission do have a very important role to play. My predecessor lost one judicial review case; I have won one at the very first hurdle. Both of us, I feel, could be heavily influenced in our approach to our duties by the fact that they are judicially reviewable, that we need to give proper reasons and decisions for our decisions, which can be examined by the courts, and of course by everybody else.

  590. But not on the merits?

   (Mr Fletcher) Not strictly the merits; of course, we are talking about process. When we come to the merits, there the Competition Commission and now the Competition Appeals Tribunal, where we are talking about competition specifically, have a key role to play. If I take the Competition Commission first, they can examine afresh my price-limit decisions, and at each of the periodic reviews since privatisation two companies have chosen to take that decision on to the Competition Commission. The last two, following 1999, both gained increases in their price limits as a consequence of going to the Commission. In the one which you have raised by the water industry, it is their wish that such appeals could be made not about the price limit as a whole but about bits that they choose from the price limits, or even bits of my methodology selected in advance. I can see, I have to say, a slightly specious case for such an approach. I have to say also that I think it would be inequitable in that it is only the company which can take my price limit decisions on the review to the Competition Commission. The customer and the customer's representative cannot do so. It is therefore, I believe, inevitable that if companies could cherry-pick the bits they did not like, they would of course take those where they thought I had been too harsh, ignoring the fact that in other areas I had misguidedly been too generous, as they secretly know, and removing the discipline which exists at the moment. They either have to look at the limit as a whole and say, "Yes, this is do-able; the regulator may have got some bits of it wrong but we can live with that", or they have to take the whole to a fresh examination in front of a totally independent panel, where I would give evidence alongside the company and where the Commission would reach a view. The Commission, of course, can also review license condition amendments which I propose and which the companies are not prepared to accept. The Commission has various entre«es which they exercise, and then there are merger issues as well, but I will not take you too far into that.

  591. In short, you do not consider there is any need for any further method of appeal for the company open to the consumer?

   (Mr Fletcher) I think that there are some areas, subordinate decisions, where I become involved. For example, sewer appeals: if a company refuses to adopt a sewer as public, the applicant may appeal to the director. I am the last court of appeal on this particular one, and there are issues not unlike it. My decisions in those cases are judicially reviewable but, as you say, in that case, it is not going back on the merits. It is always a balance, is it not? There is a danger, if I take the Civil Aviation Authority as a rather unusual regulator, where you have the Competition Commission and the CAA boxing and coxing; it may work for them. I find it a very difficult animal to envisage operating in something like the water sector. If the world at large does not have confidence that a carefully taken decision—and you will know it is carefully taken and if it is not you can judicially review the process—is not going to stick, then the regulator becomes only a half-way house en route to the appellate body. I think that would serve to undermine the structure of regulation, but I can well understand some scepticism of your Lordships about regulators saying that we want to leave things as they are. I am not saying there is never room for improvement. The Competition Appeals Tribunal, including the Tribunal itself, at the moment is feeling its way into what is an important, new appellate body and its role and the way that it will effectively re-shape the way we approach our tasks.

Lord Elton

  592. You describe yourself as a non-ministerial government department. Everybody , part from yourself, in your organisation is a civil servant. The principal body appointed to voice criticism on the part of the consumer is appointed by you and you are responsible for their pay and their rations. You can understand that you are regarded with some suspicion in some quarters as having too much power. You tell us that Ministers never lean on you excessively, and so you appear to be in a position of a very fortunate junior Minister with a Secretary of State who does not much mind what is going on. This is not meant to be unsympathetic but I am trying to categorise you and your position. I was interested in the remark about Ministers never having leant excessively upon you. I realise that giving evidence, which can be read elsewhere on matters like this, is a sensitive thing, but can you actually describe more precisely what your relationship with Government is? To whom do you relate in Government as a matter of routine and what are the channels for that relationship?

   (Mr Fletcher) I just declare that I have worked for Lord Elton in a previous incarnation as a junior minister when I was myself a civil servant. The first point is perhaps one of basic good housekeeping. Ofwat's budgets are subject to Treasury scrutiny in just the way that any other Department's of State budgets are subject to that scrutiny. It is not a mere paper exercise. That is a proper, hard scrutiny of whether we really need to spend what we intend to call on from the water customers. Although we are formally financed through votes, that is for the purpose of accountability; the money actually comes from the licence fees and our particular entre«e to water customers of the companies. Our accounts are audited by the National Audit Office. I am glad to say that we have been given a free bill of health over the last couple of years. I appear in front of the Public Accounts Committee. I know that is not quite the same as appearing before Ministers but, like all accounting officers, and I am an accounting officer; that particular committee, as indeed all the select committees, is taken very seriously indeed. The PAC obviously has the right to look across the board. The last time I appeared in front of them, it was with my colleague David Edmonds of Oftel and Callum McCarthy of Ofgem, doing a comparative job on the regulation of pipes and wires, where there was quite a lot in common between our respective sectors. I think that is a valuable discipline, which you will find regulators take seriously. Ministers would make it very clear to them if they thought I was making a mess of my job. I think that would be entirely appropriate. They might do it in public; they might do it in private, or they might do both, but so will WaterVoice, so will the companies, so will other stakeholders, environmental groups and others. The chair on which I sit as regulator does not at all feel a comfortable one in which I am, so to speak, protected from criticism. I am exposed, I think, as is any public servant, to public criticism of all sorts, and I think it is entirely right that I should be because it is an important post. I say that I work within a statutory framework; I could not do without it but I need the discretion to work within that framework if I am to do the job with appropriate consistency and flexibility. I then try and tie myself down further because I think that is in the interests of good regulation, and so I sign up, at the moment of my own volution, to the five principles enunciated by the Better Regulation Task Force for regulation as a whole: transparency, accountability, proportionality, consistency and targeting. I will be bound by that. I will make those my touchstones. I particularly think that transparency of decision taking and the approach to decision taking, which includes consultation on all the key issues, is absolutely key to doing the regulator's job properly and ensuring that the decisions which emerge at the end of the day, which will then be my decisions, are taken on a proper understanding of the issues in front of me.

  593. Could I then ask you, and you said a moment ago that the press and media at large are a key part of the accountability of the regulator, how that meshes in? I assume it is not just the business of it being unpleasant to be pilloried, which it certainly is, but does it relate to the effect that the press has on Ministers or on customers, or what?

   (Mr Fletcher) No, I think it is much wider than that. I publish all these various reports. They will be read by the sort of "wonks" of water policy, those who really want to get deeply into it by the companies, WaterVoice maybe, and a series of others. They do not have a huge distribution. It is the press who will convey, in their own words, the messages that as regulator I am trying to give, that this is a stable, transparent system, which is not out of control, which is not something where I can simply behave as a maverick as I choose, but where I am working within some pretty close constraints on how I do my job. This is an important part of it, and, yes, it is not unlike what a Minister perhaps is sometimes doing, so it is very unlike the role of a civil servant who is keeping his mouth shut. I am trying to condition the debate and to help it move forward on various issues. For example, looking to the next period review, I am signalling that customers should not expect reductions. If I did not signal that until my decisions appear in draft form in July next year, I think I would be falling down in my job because I would be producing a huge shock to the system, and part of my job is to ensure that the decisions, when they emerge, emerge with as little unnecessary surprise as possible. One of your printed questions concerned regulatory certainty. I do see minimising unnecessary uncertainty as an absolutely key part of my job. Talking to the press, talking to the City, sometimes in very large conferences, is a key part of that. Also, I am taking messages back from them; I am hearing what they are relaying to me from a whole series of other stakeholders in a purely public forum. No, I will not be corrupted from what I think is the right way of doing my job, but I must be influenced, as a Minister is, in my particular, narrow, statutory field as to how I do it.

Chairman

  594. I am conscious of the time, but coming to the core issue of accountability, and part of what has been said, it also brings me back to your answer to Lord Holme's first question: in your capacity as a non-ministerial government department, you are part of the executive. It could be argued that that is a strength from the point of view of accountability. It establishes your locus as a body accountable to Parliament. I am just wondering if there is anything more that Parliament itself could be doing? One of your colleague regulators, whom we will be seeing later, has said in written evidence that he welcomes more regulation and systematic screening of the work by Parliament. Is that a view you would share? Is there anything more that Parliament could do to question your activities?

   (Mr Fletcher) Chairman, I go on from this eminent Committee to another eminent committee in Portcullis House this afternoon, the Committee for the Environment, Food and Rural Affairs, to be examined on my annual report. This will not be the first time that that committee has examined me because they have examined me on specific topics, but I hope it will be the first of a regular annual session in which that committee will feel free to ask me as regulator absolutely anything, which is what I was used to doing as a Director of Finance in the Department of the Environment in front of the same committee's predecessor on the vote every year. That enabled members of that Committee to ask me anything from gypsies to urban renewal. I think that is an important part of accountability. I think select committees have the opportunity to examine people like me in more depth than can conceivably happen when anyway I am gagged from debates in the Chamber, and I value it. In my case, I think it is appropriate that there should be a link with the Environment Committee because it is marking the department which has overall responsibility, at least in England, for water policy. Incidentally, I myself make similar appearances before the Welsh Assembly Government's equivalent committee. I think all of that is valuable. I know there is talk about a specialist committee possibly which would look across the board at regulatory issues. There are dangers of an overcrowded field because it is not just the Environment Committee; I would certainly feel that the DTI committee might call me on just that sort of cross-regulatory issue. The Environmental Audit Committee has called me in the past and the PAC has called me. There will always be a question: is there room? But there is certainly room for a parliamentary committee to think very hard about this creature of statute which, over the last 15 or 20 years, has become more prominent in the way things are done and where there are lessons to be learnt and read across the board. I would really look forward to your report as offering further help on that.

  595. I take it, and this is in your answer, that one of the things you welcome is regularity in the knowledge that annually you would be able to answer, apart from when specific issues may come up and you are called to answer?

   (Mr Fletcher) All Members of Parliament and peers are very busy people and I know that, so there is always a danger that unless something is put in your diary as a fixed, annual event, it will slip by if it is not causing trouble, whereas I think the fixed annual event is actually helpful here to make sure things are not going to cause trouble.

  596. Just one final question which you touched on much earlier, and that is looking slightly more horizontally at the contact that regulators have with one another: how extensive is that and how useful is it?

   (Mr Fletcher) It is informal. There is usually a two-month or three-month meeting between the sectoral regulators, which does tend to involve others who are not sectoral regulators, including the Office of Fair Trading. John Vickers, the Director General, is now Chairman of the Authority and he is in the key role there. The meetings do some work which is specific and joint. For example, and I think it is fair to say this, it was at Ofwat's instigation that we have very recently collectively produced a report from independent experts on the cost of capital, which, for all of us, is a key issue going forward. In the past, we have sometimes very nearly coincided and sometimes been a bit away from each other. The world has said, "Oh, the regulators are not properly co-ordinated because they come up with different figures". Interestingly, this particular study—and I can assure you it was independently arrived at—says that the basic approach the regulators are taking, which is called the Cap M model, is the best we have got, though it is imperfect, and yet within it there is genuine room, for a variety of different conclusions. It is helpful to know that it does not help us to say that in future we must be identical, but the mere exchanging of views on issues of common concern is valuable. I think it is obviously right to keep looking at sectoral regulators to decide whether you still need a sectoral regulator. They are not beasts that should be there for ever if the need for them passes away. As long as a particular sector has sufficiently different characteristics as to mean that, if OFT were doing it all it would have to set up a whole new department to regulate that particular sector, then there is at least something to be said for having a sectoral regulator to look after it, and thus keeping in touch with his peers.

  Chairman: Mr Fletcher, I am conscious of the time. We are grateful indeed for you being with us this morning. This has been extremely helpful. You have got us off to a good start. It is for us to go away and think about the issues that you have identified, not least whether we characterise your role as a junior minister or, as you said, a cheer leader. We are very grateful indeed for your being with us. It has been extremely valuable.


 
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