Examination of Witnesses (Questions 311-319)|
WEDNESDAY 9 APRIL 2003
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
(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.
315. How important to you are regulatory impact
(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
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.