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Agenda item 3 is our second evidence session on Scottish Water's annual report and accounts for 2007-08, on which we have heard evidence from Waterwatch Scotland and will hear evidence from Scottish Water and Scottish Water Solutions in early December.
Thank you for inviting the commission to give evidence. May I say how nice it is that tap water is provided for our delectation—I have been to many places where bottled water has been provided.
I will make clear what my role is. I am the drinking water quality regulator for Scotland and I was appointed by the Scottish ministers under the Water Industry (Scotland) Act 2002. The office is part of the Scottish Administration. My general function is to ensure that Scottish Water complies with its drinking water quality duties. I am also responsible for supervising local authorities' enforcement of the private water supply regulations.
Sir Ian, you gave a general view of Scottish Water's performance in 2007-08. Would you like to add to that or would the other witnesses like to give their general view on Scottish Water's performance? Improvements have been outlined, but do you have further concerns of which you want the committee to be aware?
One extra concern is leakage, on which much more action is needed. That is important for the economics of the operation and for climate change, because there is not much point in pumping water into holes in the ground. Scottish Water was set pragmatic targets, because we do not yet know the economic level of leakage, but it failed to meet those targets. Action must be taken to do better. This evening, the commission will talk to Scottish Water's board—in fact, I will go there immediately that I leave the committee—and leakage is one point that we will discuss.
Would the other witnesses like to make general comments about improved performance or express concerns about performance?
I welcome the significant improvements that Scottish Water has made in recent years in drinking water quality when compared against the regulations. I am concerned that customers' perception is not being addressed as well as it might be. I refer to the aesthetic parameters—issues such as taste, odour and discolouration. Although technically water may be acceptable and may meet all scientific standards, customer's perception is not quite what it should be.
You mentioned leakage. Does the commission have available to it the sanctions to address the issue?
We believe so. We must begin by establishing the facts properly. First, we need to establish the sensible economic level of leakage to which Scottish Water should aspire; work is still under way on that issue. Secondly, we must get proper monitoring of the progress that is being made. Thirdly, we must ensure that Scottish Water devotes enough effort to that. The chairman of Scottish Water has assured me that it believes that much more monitoring activity is required than took place in the past. At one time, monitoring was regarded almost as a Friday afternoon activity—it must happen earlier in the week. So far, there has been progress on all fronts. If we did not have sufficient powers, we would talk to the Government to ensure that we had such powers. For the moment, our powers are sufficient, but progress is rather slow.
Is there evidence that the water industry has set itself harder, more ambitious targets on leakage every year?
We have set pragmatic targets on leakage; so far, Scottish Water has failed to meet them. We must first ensure that they meet the targets that they are set. When we have better information on the economic level of leakage, we will move Scottish Water as fast as possible to that level. There is a huge deficiency of information in the area.
In its annual report, Scottish Water talks a lot about value for money. Do you think that Scottish Water is delivering value for money, in an absolute sense, to its customers? Are there ways in which it could increase further the value for money that it delivers?
It is always possible to do better on value for money. As human beings, we always seek improvement in what we do, so we have not got to the end of the road. However, Scottish Water has improved value for money considerably on the operating side. In the past few years, it has reduced its operating costs by about 40 per cent, which is a huge achievement. It has also improved its efficiency on the capital account. Now household customers are paying, on average, about £90 a year less than they would have paid if that improvement in value for money had not been made.
Good afternoon. I have a further question about targets. In the ministerial objectives, Scottish Water is set essential and desirable targets. Desirable targets were considered achievable, given the finances that are available to Scottish Water. Has Scottish Water met all essential and desirable targets?
Those are the essential and desirable targets that were set for the period from 2006 to 2010, which is not over yet, so we will not know whether Scottish Water has done all that until we do a proper audit, which can take place only after April 2010. So far, things are going well as far as levels of service are concerned—at the moment, Scottish Water is only fractionally short of the service levels target that was set for the whole period. On the capital account, as we suggested in our investment report, the jury is still out. We will see how that goes, but so far, so good.
In January, Alan Sutherland suggested that, from the commission's point of view, some of the targets that are set for Scottish Water are viewed as minimum acceptable levels of performance. In which areas are those different targets set?
Some targets are about proper continuity of supply and whether customers' telephone calls are answered properly. Substantial improvement has been made in all those areas. Although Scottish Water is not yet as good as some of the English companies—I see no reason why it should not be as good as the best of the English companies, as there is nothing wrong with Scotland—it is moving in that direction, but further progress can be made.
Are there aspects of the targets that should be more challenging or aspirational?
The process should work by regulatory period. We want to give Scottish Water a proper, sensible four-year period in which to achieve its targets. We will publish draft price limits for the next period next June, when we will think about where Scottish Water should go next. Reviews of service levels are being carried out in England and Wales. We keep in close touch with our colleagues in England and Wales to ensure that we set Scottish Water targets that will make it as good as any other company in the kingdom.
I know that this is a perennial question, but given that Scottish Water is at a different stage of development and that it is playing catch-up with other companies in the UK, how is it possible to measure its behaviour and achievements against those of English and Welsh companies that have been engaged in the process for far longer?
To its credit, Scottish Water has been catching up extremely well; it has shown that it is possible to catch up fast. As far as levels of service are concerned, Scottish Water is now firmly in the pack of English companies. It has shown that it can be compared quite favourably with English companies. The next stage is to ensure that Scottish Water improves its placing in that pack.
I have a question about efficiency. I gather that the efficient government initiative set a target for Scottish Water to deliver £100.5 million of efficiency savings for 2007-08. The Scottish Government recently published its efficiency outturn report, which stated that it had not been possible to certify that Scottish Water achieved those savings and that it would be for the Water Industry Commission to confirm the level of efficiency savings that were expected. Do you expect Scottish Water to deliver £100.5 million of efficiency savings? If not, why not? If you expect it to deliver that level of savings, could it have done more?
That depends on where one starts from. I am afraid that I am not briefed to answer the precise question that you asked, but I can tell you that I believe that Scottish Water has improved efficiency by more than nearly all the other parts of the Scottish public sector, so it has done extremely well. When the regulatory period 2006 to 2010 is finished, we will report on what Scottish Water has achieved during that period. However, compared with the situation that it faced earlier in the century, Scottish Water has done a great deal on efficiency. Operating costs have fallen by 40 per cent. On average, customers now pay £90 less than they would have done if there had not been that achievement in efficiency. There is no doubt that Scottish Water has improved its efficiency considerably. Exactly how the company has performed against that particular assessment over the period will be considered in our arrangements for the proper monitoring of the whole regulatory period.
In January, Alan Sutherland said:
Since January? We do not do things on an annual basis, so I am not sure that we will have figures on that. Craig MacKenzie might be able to say more.
As the committee will be aware, within the past couple of weeks we have published our assessment of Scottish Water's customer services. Sewage treatment works compliance remains an issue on which Scottish Water performs less well than the companies in England and Wales.
We have a particular issue with some of the treatment works that were built early on under the private finance initiative. One such treatment works in my constituency—as with another in Mr MacAskill's constituency—produces significant odour problems. The issue seems intractable because Scottish Water has not been able to find a way of dealing with the problem because of contractual issues. Is the commission trying to find a way to resolve that issue?
There have certainly been problems at Seafield and at Dalmuir in your constituency. The issue is about how Scottish Water ensures that the contractual arrangements work properly. We have been assured that there are plans to improve those works to reduce the amount of odour. The situation is really not acceptable, but it takes time to sort it all out.
The problem is that the issues have existed since 1997. Despite various promises that something will happen, no proper engineering solution seems to have been provided. Is there a mechanism whereby we can raise the issue with the commission or with Scottish Water to find a way to cut through the problem?
We have to leave the management of Scottish Water to Scottish Water. It would be wrong for the regulator to try to get into the details of management, for which we are not equipped. I assure you that no one has approached us about any financing issues. If there were financing issues, they should come to us to discuss them.
Scottish Water admits to a "rising emissions trend" in its annual report—
Sorry, I have had a request for a supplementary question on the issue of sewerage before we move on to the next question.
A specific concern in the crofting counties is the need to ensure that houses are built in an environmentally sustainable way, which generally means building them on common grazing rather than on crofting land or on inby crofting land. Does the current regulatory set-up recognise the need for Scottish Water to provide sewerage and water to places that the community considers are environmentally and socially sustainable for housing rather than just to those places that would be quickest, easiest and cheapest to supply?
Our first task was to ensure that sufficient money was available to allow houses, factories and other commercial premises to be properly connected to Scottish Water's strategic resources. We are satisfied that there is enough money for that. The complaints that we received about development seem to have died away, although I am not saying that everything is perfect everywhere.
Indeed.
We like to hear about specific issues so that we can decide whether there is a generic answer.
I do not want to stray into specific examples, but the chief reason that people give for building on croft land in a way that might not be considered environmentally or socially sustainable—in other words, for building on land that should be used for crofting—is that it is prohibitively expensive to bring in water and sewerage facilities to areas that would be considered environmentally and socially sustainable. We can perhaps pursue that at another stage.
There is an argument about multiple objectives. Sometimes it will be desirable to invest in particular places, and that can happen in derelict urban areas as well as in rural areas. We want to ensure that Scottish Water plays its part, but that will not mean that it picks up bills that others might pick up. I do not think that Scottish Water's customers would thank us if it did.
I understand that Scottish Water is Scotland's biggest consumer of electricity. Changing technology in the water and sewerage industry means that emissions are an increasingly important issue. What can Scottish Water do to reduce its emissions and its consumption of energy?
To reduce its energy consumption it can start by reducing leakage. After that, I am sure that there is scope for many other ways of improving energy efficiency. I was working in the United Kingdom Treasury back in the 1970s when oil prices went up, and it is amazing how much more efficient our fuel use is now. I am sure that there is still further to go. We will encourage Scottish Water to implement efficiencies that are cost effective.
What scale of reductions might be feasible—bearing in mind industry standards and improvements in the use of technology? It is one thing for us to think about what is desirable, but it is an entirely different thing for us to make realistic assessments—based on information from you—on what Scottish Water can achieve.
The first thing that you should do is go to Scottish Water. Then we would check whether its answers made good sense.
I acknowledge Mr McNulty's point. Today's water treatment processes are power intensive. To that end, we have sponsored a PhD student at the University of Edinburgh to research renewables-powered water treatment, particularly for the north-west of Scotland, where there are many small water treatment works that might benefit from such technology. We do not have an answer yet, but we are certainly considering the matter.
The drinking water quality regulator's 2007 report states that there were 64 water quality event notifications that were classified as serious incidents. Do you have any views on the number of such incidents relative to the scale of Scottish Water's operations? How does it compare with previous years?
The number is similar to previous years. A large number of events is reported to us because any kind of technical failure is reported to us as an event. My staff make a judgment as to how serious an event is. If it is considered serious, it will be classified as an incident, which requires further investigation and a detailed report. Any disinfection failure, or any time that a boil water notice is issued, is considered serious enough to warrant classification as an incident.
How have you found Scottish Water's performance in the event of a water quality incident?
Scottish Water is very good at responding when an incident occurs and fixing the problem after it has happened but it needs to learn how to prevent incidents from happening in the first place. It could make more use of its information and historical results to find out where things might be going wrong and prevent incidents.
You said a moment ago, in response to my first question, that you were not particularly interested in reducing the number of events. Would targets not help to focus Scottish Water's mind on that matter?
I think that targets might result in a tendency to drive the reporting underground. I am happy that incidents are being reported to me; if there were targets, incidents would stop being reported to me.
Another notable feature of your 2007 report was the number of incidents involving cryptosporidium. Were they preventable?
They were largely due to the weather conditions. There were small supplies, and the changes in the weather in July and August caused the problems. Such incidents are preventable if the appropriate treatment is in place, but that is expensive. At the moment, we have a robust monitoring regime, which enables us to know whether there is a cryptosporidium problem and instruct the local population to boil its water.
You said in your report that the incidents were due to insufficiently robust treatment processes. What action is Scottish Water taking to increase the robustness of treatment processes?
It is reviewing the treatment processes not only at the works that were featured in my 2007 report but across a range of its works and putting in new ones where appropriate.
I will ask about the guaranteed standards scheme and minimum service standards. Gary Womersley from Waterwatch Scotland said that GSS payments were available for issues that were no longer a problem and that he
The guaranteed standards scheme is the rough-and-ready compensation for when things go badly wrong, such as people not turning up for an appointment. That is an essential first step. It might well be that payments should be extended to other areas. I would very much like to hear from Waterwatch to which areas it wants payments to be extended.
We have all been there.
I very much encourage Waterwatch to consider the quality of the answers that people get. When I was at Ofwat—the Water Services Regulation Authority in England and Wales—I encouraged the customer service committees to undertake special audits, whereby a panel would look at a sample of cases and consider whether they had been handled sensibly. We work by numbers, which is a problem, because numbers do not tell the full story. We need a battery of the numbers and the quality, and we need to keep pushing forward all the time, because customers, who are the important people, have often been neglected.
I suppose that numbers can at least tell you how long the recorded message is.
Indeed.
Could you contemplate moving from GSS to MSS? It is a minimum standards issue.
I am sorry; you must remind me what MSS stands for.
I am talking about minimum service standards, which would encapsulate some of what you were saying.
I am slightly ambivalent about minimum standards. I want standards to improve, and constant pressure must be applied to ensure that that happens, but I like to think much more in terms of aspirations to raise the average. If we concentrate on minimum standards, there is a danger that everyone will feel happy at a level that is just above the minimum. However, it is a question of style. There might be minimum standards in the package.
Does Colin McLaren want to comment on that?
We have done audits of customer contacts and the quality of responses. However, we considered whether Scottish Water had given appropriate advice; we did not consider how quick responses were. We looked at the quality angle.
The Flood Risk Management (Scotland) Bill has been introduced and will address external sewerage flooding. Waterwatch Scotland put that at the top of its list of issues that are "bubbling under the surface", as it put it in evidence to the committee in October. The bill will designate Scottish Water as a "responsible authority" and impose on it a duty to exercise flood risk management functions. How can Scottish Water take on that duty in the current programme?
If the Scottish Government, which must be the prime mover in this context, decided that the obligations on Scottish Water should be changed within a price period, we would have to be told and we would consider the costs of doing that. The costs of dealing with external sewerage flooding might be considerable in certain cases, but that is not the point; the point is that the first move should be with the Scottish Government. Of course, the Government might want to consult Scottish Water and the Water Industry Commission for Scotland on the costs of imposing such an obligation.
You mentioned prices. I presume that borrowing requirements are part of the opportunity. If the current investment programme could not cope, with an interim determination decided before the end of the four-year period, it might well be possible to borrow to try to tackle some of the sewerage issues.
That takes us back to Government expenditure. At the moment, the borrowing for Scottish Water comes from the Scottish Government, but the Scottish Government is thinking about other arrangements, such as the Scottish Futures Trust, which might change things.
Indeed. I suspect that we will deal with that on another day.
I do not anticipate any other implications, simply because we would normally expect the initiative to come from Scottish ministers. After all, they have seen the bill go through Parliament and it is for them to start the process. I am happy to think about all these things, but we have an awful lot on our plate at the moment.
I would like to ask some questions about the overall performance assessment. The OPA in Scotland differs from that in England and Wales. What measures were left out of the Scottish OPA that are used in England and Wales and why were they left out? Which ones will be included in future?
I shall have to ask Craig MacKenzie to help me with that question. Certain measures of serious pollution incidents are handled differently in England and Wales and in Scotland. I guess that there will always be something that arises out of the geography. I come up from Birmingham regularly on the train and I see that the geography of northern England is not altogether different from the geography of southern Scotland. There is a good deal of similarity, so one should not emphasise the differences too much.
You asked what measures were missing. When we brought in the overall performance assessment in the most recent strategic review, we had information on 11 of the 15 areas used by Ofwat. Of the four areas that were missing, three relate to pollution incidents—there is a measure of serious and less serious incidents on the waste water side and a measure of serious incidents on the water side. There is another measure called assessed customer service—this goes back to what Sir Ian Byatt was saying earlier—which is a more qualitative assessment that is carried out by Waterwatch. We are aiming to have all those measures in place for a full comparison at the time of our next strategic review in June next year.
That leads me on to my next question, which is about quality. Waterwatch Scotland criticised the OPA scoring system because it was entirely about quantity and customers are concerned about quality. What plans are there for Scottish Water to be subject to qualitative assessment rather than quantitative assessment of the OPA?
The qualitative assessment may well go beyond the OPA. I believe that it should do so. Both quantitative and qualitative assessments should be made. Under the present institutional arrangements, it is convenient for us to do the quantitative assessments, because we are to a considerable extent a numbers organisation, and for Waterwatch to do the qualitative assessments. We should be talking to each other about how the package works. I accept entirely that the quantitative assessments are only part of the story.
Can you give any indication whether Waterwatch's qualitative assessments will be implemented?
I am afraid that I am not completely au fait with exactly what Waterwatch intends. It wants to do those qualitative assessments. I ask Craig MacKenzie whether it has told us exactly what it wants to do.
It is our aim that the qualitative assessment part of the OPA will be in place for our next review, which will be available in draft form in June next year.
Is the OPA target essential, desirable or aspirational? As Scottish Water is very close to reaching the target for 2009-10, is the target too soft?
That is an interesting question. Scottish Water has done jolly well to get there and many people did not expect it to do that. The best thing is to say, "Well done," but, when we set the next targets, to say that it seems to us that Scottish Water can do as well as the companies in England and Wales. We will think about the appropriate targets. It is important that people have incentives to do well. If they have done well against a target, they should be congratulated and, sometimes, financially rewarded. That means that we can ask those people to go even further—that is the whole process of reward and aspiration. Of course, there must be a bit of punishment for people who fail to meet their leakage targets.
I do not know about the punishment, but let us see about increasing the targets.
Regulators must always remember that they deal with human beings, that those human beings respond differentially to sticks and carrots and that we need a mixture of both. Even regulators need to be assessed properly.
We could be here all afternoon speaking about sticks and carrots. Perhaps we will do that another day.
We were told in January that three companies were ready to enter the retail market for non-household customers. We have now had a good six months since the market was opened up. How many entities now operate in the market for retail competition in the water industry and how are the new entrants doing?
The new entrants that are currently operating are Satec, which is a specialist company that often deals with measuring equipment, and Osprey Water Services, which is part of the Anglian Water group. Both of those companies have customers. The incumbent was Scottish Water Business Stream, which is Scottish Water's former retail arm, but it is now being run very differently and with a different style. We also have Ondeo Industrial Solutions, which is part of the French company Suez Environnement. Ondeo has a licence but, so far, it is not fully into the market, although we expect it to be in the market. We had a little hitch with a company called Aquavitae, which came into the market and then collapsed. However, we are glad to say that that was managed without any customers suffering.
You have touched on Scottish Water Business Stream, but I ask specifically how it is performing in the new market.
It is performing with great energy. It is interesting to see the transformation, the different culture and the way in which Business Stream is offering people better deals. It says that 30 per cent of its customers are now on a better deal, so that is pretty well 30 per cent of all the customers in Scotland. There is no doubt that the incumbent has woken up quite a lot as a result of the new companies coming in. What one might have predicted has been happening.
The objective was to create a real market in the non-household sector. Has a real market been created, and how is it functioning?
There is a real market in the sense that anybody can change to another supplier and there are other suppliers to change to. The real market is also being created in the sense that a central market agency has been created to carry out all the switching of suppliers for customers in the same way as Elexon has done in the energy market. All the arrangements exist, as do those to allow people to self-supply.
In January, Alan Sutherland told us that he was
Osprey, which is owned by Anglian Water, has come into the market, but other big companies in England and Wales have not. Competition in England and Wales is currently being examined, and I suspect that they are wondering how Professor Cave's review will come out and how Ofwat and the Government will respond. Those companies are probably looking at their own situation, but I am delighted that Anglian Water has decided to get ahead of the game.
Is that the only reason why only one English company has made a move?
I do not know. It is one plausible reason, but it is not something that we have researched.
You mentioned some of the benefits that have accrued as a result of the market. Have any unforeseen problems emerged in the setting up or running of the market?
I suppose that the collapse of Aquavitae was an unforeseen problem. We did not expect a company to come in with enthusiasm and then be taken over before withdrawing from the market. It was not ideal, but the big point is that the market recovered perfectly happily. Everybody was transferred to other suppliers, and no customers lost out. That showed that people can come into and exit the market, which is what you would expect in any competitive market. Groups such as Tesco come into the newspaper-selling business, as do corner shops, and sometimes they go out. The big test is whether customers are losing. In the case of water, customers did not lose.
Mention of the collapse of Aquavitae will send terror into the hearts of all MSPs who represent distilling constituencies.
Quite.
I am tempted to comment on the likelihood of Tesco, as opposed to the small shop, going out of the newspaper market, but there we go.
The commission's investment report for 2007-08 stated:
You might be overstating the matter as you put it. It is true that the money is being spent and that the number of projects passing the sign-off stage is not as big as we would like it to be. Nevertheless, I must stress the importance of sign-off and the fact that these things have to be signed off by my colleague Colin McLaren and by the Scottish Environment Protection Agency. We see it as a piece of joint regulation to help the environment as well as customers.
One of the issues that arose in 2006, when we moved from quality and standards II to quality and standards III, was the hiatus because of the pressures around closing down one programme and getting the projects in place for the new programme. There was a significant blip in the investment pattern at that time, despite the fact that the problem was flagged up to the Government well in advance—it did not seem to be something that could be organised out. There is a fear that the same thing might happen in 2010. What can be done to ensure continuity of investment, from the point of view of both the customer and the construction industry?
Certainly, now is not the right time to cut investment. I am not convinced that the slow start to the current programme was necessary. There is still an overhang from the Q and S II programme. What should be done to ensure smooth movement? Essential planning should take place, which need not cost money. That is probably what my colleagues will be saying to Scottish Water right now or shortly. I will certainly tell them to talk in those terms when I see them later this evening.
Does the Scottish Government have a role in that? It has to establish the parameters within which the next Q and S round will be taken forward—both the price mechanism and its contribution to deciding the investment parameters.
The Scottish Government will issue—as soon as possible, I hope—its directions for Q and S for the next period. We need those soon, as they will be helpful. There are also interesting issues in different parts of Scotland. For example, in Glasgow, a whole set of investments is due relating to the Commonwealth games, including the M74 completion project and a velodrome that is being built. We have been talking to Glasgow City Council, and I go to see its chief executive from time to time. We have set up a planning team, because we want to ensure not only that there is sufficient investment but that the investment does not start to crowd itself out on the ground.
It is the A96.
That is correct—it is the road that leads east out of Inverness. Some concerted planning needs to take place there, involving Scottish Water as well as other bodies. Those things are important, as is ensuring that the total levels stay up. We always consider what is delivered, rather than just the money that is being spent.
Is there an inconsistency between your desire for an acceleration in the pace of Scottish Water's investment programme and your analysis that managing such a large programme has efficiency issues, which might affect other projects such as schools, roads and hospitals, and the construction industry generally? What can be done to resolve that apparent tension?
The tension occurs because, in the present regulatory period, we have a big, highly ambitious programme, which we have been pushing Scottish Water to achieve. Our disappointment is that more projects have not been signed off by now—although quite a lot have been, and we should not exaggerate the issue. That is the problem for this regulatory period.
Is the lumpiness of Scottish Water's programme—as I would term it—in the period that we are in now, rather than in the next four-year period?
We are trying to do a huge amount at the moment. Therefore, it is a lumpy programme. Generally speaking, although there will be a number of quite big projects, including in Glasgow, many of the projects are quite small, and they are spread around the country.
If delays in the investment programme lead to increased costs for Scottish Water, how will those costs be met?
By the Scottish Government. Customers do not pay twice.
Okay. That is nice and clear—that is the kind of answer that we like.
Keep your eye on that one.
It is rare that cabinet secretaries give such clear answers, it has to be said.
I have nothing to add.
You have given us a very satisfactory set of questions, and we hope that we have given you satisfactory answers.
That sounds like a "Yes Minister" response.
I have nothing further to add, thank you.
There are no final questions from members. I thank all our witnesses for the time that they have taken to answer our questions.
Meeting continued in private until 16:50.
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