THURSDAY 6 JULY 2000

SIR IAN BYATT AND MR KEVIN RIDOUT

  300. Is there not an argument for Ofwat directly employing the reporters? You have a two-stage process. The reporters are employed by the companies and then you vet the reporters. Would it not be simpler to kick out one of the stages by employing the reporters directly?
  (Sir Ian Byatt) That is always possible and I do think about it from time to time, but we think there is some merit in the close working relationships that there are between the reporters and the companies which enable them to discharge their duty of care rather better to us. I agree that it is an issue which one may easily come to a different conclusion about.

  301. Fine. If I could ask about the format in which information is provided by companies because there is some comment by the companies in their evidence that they felt there was not yet a standardisation of format. They specifically referred to the spreadsheets used by all three of the Regulators, the DWI, the Environment Agency and yourselves. The spreadsheets were not compatible and this was a criticism by the companies and also the timescale for the request of information by the different Regulators were not compatible. Is that a justifiable criticism or something you are aware of?
  (Sir Ian Byatt) We go to a lot of effort to try and make sure that we get comparable information from all of the companies and it is properly entered on information capture systems and we send out these information capture systems so the boxes are properly filled in. We check of course whether they are properly filled in and usually they are. On these particular spreadsheets—and this is not the normal information system—if there are discrepancies we would like to think about them and think about ways we can better design these spreadsheets.

  302. It is not something they have raised with you already?
  (Mr Ridout) I think I know what Water UK might be referring to, if this is a criticism by Water UK, and it is about the cost drivers for various schemes on the NEP spreadsheets issued by the Environment Agency. There was some difficulty experienced by the companies in judging what cost driver to use when completing our information submission requirements. It has never been satisfactorily explained why this difficulty arose because we have provided adequate guidance about the cost drivers which was totally consistent with the information provided to us by the Environment Agency. If there is a problem I would put it at the companies' door really.

  303. This is something that you can discuss? Have you reached a stage of irreparable breakdown over this issue or is it something they have not formally raised with you?
  (Mr Ridout) It is something we can no doubt improve upon next time round but it was not a big problem this time.
  (Sir Ian Byatt) There are always lots of little things.

  304. Of course, I am trying to sort out what are the small things and what are the big things. One of the big things is that from your point of view you criticised the companies in terms of their business plans saying that these were not really strategic business plans, these were bidding documents.
  (Sir Ian Byatt) Yes.

  305. Why do you think that is? Is that just because they think they are out to get the better of the Regulator, is this the legacy of the pre-privatisation system of annually bidding for resources? Is this an insoluble problem?
  (Sir Ian Byatt) It is a difficult problem because we know in all organisations the operating people put together their budgets and then there is the central finance function that says "you must be joking, this is what is going to happen". Of course, that central finance function tends to come into operation after the Regulator has done the first cutting, you might say. I think there are some inevitable tensions there. They are tensions that can only well be resolved by first us being very hard-nosed about things, and that may be the most important thing, but also having sufficient information from our comparisons with the companies and our econometric work coming out of those comparisons, our cost base work, and also our experience of the difference between expectations and reality and the way in which costs are always going up in the future but in the past they are going down. So quite a lot of projection of the past is quite a useful tool in this area, even though intellectually it may not be quite so beautiful as the idea of entirely looking at the future.

  306. Do you anticipate that companies will respond to this criticism in five years' time?
  (Sir Ian Byatt) I hope so, yes. I very much hope so. I think it is a question of the maturing regime and I hope it will become easier. It is a question of risk. The risk on them is that they under-estimate the costs of a very big capital programme and of doing new things and they do not want to see that risk too high. The way to avoid that risk is to estimate on the high side. We have another set of risks, we do not want a risk that the amount of money given will be too high. You have got to balance those risks and there is a lot of art to balancing those risks. But, coming back to the answer I gave to you earlier, there is also a history and if the risks are not perfectly balanced then there is a way, at the next review, of correcting them.

  307. Briefly looking to the future in a sense and the workings of the periodic review. We are likely to see some changes of ownership in the water companies over the next few years. I understand there are two bids in for Hyder, which controls Welsh Water at the moment. You have already mentioned business plans and the state of some of those business plans and also your panel of experts advising you on those business plans. How will you be scrutinising the new business plans that will be coming forward from the new companies, as it were, the new owners of these companies, and ensuring that they are keeping on track, particularly with the change in staffing they may be looking at in the new arrangements? How will you ensure that they are going to meet their targets, particularly when the environmental improvements are piled up towards the end of the period and there might be a danger of takeovers and changes of management leading to a delay of some of those environmental improvements? How can we ensure that does not happen?
  (Sir Ian Byatt) It certainly must not happen. They will have to operate under the same limits as are already in existence, so they do not have to produce business plans for new price limits because there are not going to be new price limits. There is a monitoring system and the monitoring system which the Environment Agency use and the Drinking Water Inspectorate and ourselves and that will continue to operate. I want to be sure that whoever takes over these water companies, and the Hyder case is an important one, are really capable. If you take, for example, the Nomura bid, it is clear that Nomura is a bank with a reasonably long pocket and also their designated Chief Executive, Mike Kinski, I know because he did a really good job in Southern Water, so I think I have confidence that the management will be able to carry out their job. The monitoring will not stop and if something goes wrong then there will be trouble.

  308. If you see slippage you are in a position to send an early warning shot to those companies?
  (Sir Ian Byatt) Indeed, because we work closely with the Environment Agency, for example, and where you have a number of big projects you have stages of those projects and we have regular meetings with our colleagues in the Environment Agency to see how companies are getting on. We have developed that because of the big projects of the Urban Waste Water Treatment Directive, and Kevin is intimately involved in that.

  309. Following on from Mr Thomas' point, Sir Ian, are you concerned about the large fall in the share values of water companies that have taken place and the current interest in mutuality?
  (Sir Ian Byatt) It is not my job to protect anybody's share price, my job is to secure that people are properly carrying out their functions. I observed the share prices going down and then coming up again more recently. There are many influences on share market prices that are non-water issues. As far as mutuality is concerned, there is a big meeting in Yorkshire today, my staff will be there, the Drinking Water Inspector will be there and Kilda will be there, so we are exposing the issues. On mutuality my ears are open and my mouth is closed. I may say something before I leave this seat but I want to do it on the basis of good information. You may have seen the press release that the Drinking Water Inspector put out today because he is quite concerned about the effect of the separation of assets and ownership on his ability to make sure that drinking water is kept at the right quality. Of course, I shall pay enormous attention to such an important man.

  310. Do you think the fact that there is interest in mutuality at the moment is more a reflection of the price determination, which you are responsible for, or an inherent fragility in the structure?
  (Sir Ian Byatt) I do not think it is an inherent fragility in the structure. I think the idea has been around for quite some time and a number of people have come to me to talk about it.

  311. The British structure is very different from the structures in other parts of the world, it is almost unique.
  (Sir Ian Byatt) The British structure is, I am glad to say, unique. Unique and successful.

  312. That is a good thing?
  (Sir Ian Byatt) I think so.

  313. So we are alone but right, the others are united but wrong, would you say?
  (Sir Ian Byatt) No. I think we have done very well. I am genuinely proud of what has happened in the last ten years in terms of improvement in drinking water, improvement in the environment and the consequences for bills, the much greater efficiency of the water companies. I genuinely believe that it has not been achieved elsewhere, although some of the companies who have been doing really good work in this country are, of course, based abroad in some sense. Vivendi have substantial water operations in this country. Lyonnaise des Eau, which is an extremely good company, has a water and waste water company up in the North East. They are part of this successful operation. The pattern in other parts of the world is not mutuality, it is largely municipal or public sector ownership. That is true in the United States, it is true in Germany, it is true in France.

  314. The pattern is also of separation.
  (Sir Ian Byatt) No, the pattern is not of separation. In France the municipalities own the assets and they have long-term contracts which rarely change for the operation of those assets. In the United States operation and ownership are basically the same now. All water companies, however, are thinking about contracting out and contracting out can be very desirable. Many of the capital programmes are contracted out. I welcome further work on contracting out, it may well be a way of achieving the efficiency that I believe they can achieve, but it has got to be done in such a way that does not prejudice the quality of the water.

  315. So you think then, looking back as it were, that the right structure was chosen when the industry was privatised in the late 1980s/early 1990s?
  (Sir Ian Byatt) We set up a system which has evolved and will evolve and which has so far been evolving along a very good trajectory.

  316. Finally can I ask you to reflect on your period in the job a month from your departure and ask what have been your main frustrations?
  (Sir Ian Byatt) I have never seen it like that. There is a job to do and I think I would rest on the achievements.

  317. There have been no frustrations at all?
  (Sir Ian Byatt) There have been challenges, of course. There are challenges in every job. I am not sure I can remember them.

  318. What advice would you give to your successor then, to put it another way, to perhaps do things differently?
  (Sir Ian Byatt) We should not have big changes. There should be evolution rather than revolution. It is very important that the Water Regulator keeps the customer very closely in view. That is the most important message.

  319. What about the environment?
  (Sir Ian Byatt) Well, of course, the Water Regulator is concerned with the environment, as I have explained, and in that sense the Regulator listens to what Ministers are saying and does what Ministers want done in the way of financing the obligations that those Ministers are putting on water companies.

  320. Thank you very much indeed, Sir Ian, and we wish you well in the future.
  (Sir Ian Byatt) Thank you very much.