Transport, Infrastructure and Climate Change Committee

Meeting date: Tuesday, September 14, 2010

Official Report 411KB pdf

---

Scottish Water Annual Report 2009-10

Moving to item 3 on the agenda, I welcome to the meeting Ronnie Mercer, chairman; Richard Ackroyd, chief executive; and Douglas Millican, finance and regulation director, all from Scottish Water. Mr Mercer, do you wish to make any brief opening remarks?

Yes, convener. Thank you very much for inviting us to the meeting.

I think that the past year has been pretty good for Scottish Water. I do not think that its operational performance has ever been better—drinking water quality has reached a very high level and we take extremely seriously our responsibility to protect public health.

Given the committee’s comments last year that we did not say enough about climate change, we have tried to highlight what we have been doing in that respect. Scottish Water Horizons is taking shape to ensure that we can use most of our skills and assets in this area to reduce emissions further and that we continue to invest in Scotland’s renewables future.

In many ways, the harsh winter showed Scottish Water at its best; the teams went out and did really well in all weathers. I am pleased that that was seen.

Finally, now that we are almost halfway through the financial year, I can say that customer service has continued to improve and momentum has been maintained on the investment delivery programme. We have a price freeze this year and next and are continuing to knock down leakage. We have set out in the report a bit of a vision that Scottish Water’s board, management and staff have of being

“Scotland’s most valued and trusted business, one that we can all be proud of.”

Last year’s performance makes me think that we have a chance of fulfilling that vision.

As in the previous session, I want to begin by asking about certain recent events, particularly the legislative programme that the First Minister announced. As I said before, the proposal about Scottish Water was relatively new to MSPs, although I admit that its future has been commented on by the different sides in the argument. How much, if any, notice did you at Scottish Water have that the First Minister would set out in his statement to Parliament not exactly a specific written proposal at this stage, but a clear direction?

Scottish Water and, in particular, its staff were very pleased to hear those who are effectively the owners say that they think the company is doing quite well. This is a business and an industrial-type company. We make a lot of that, and the thousands of people who work for us will be pleased to hear the good news that the owners think that we are generally doing the right things.

We have been in the renewables business for quite a wee while now. One or two of you might have been to Glencorse—I believe that you have been, convener—which is a small example of a site that, with its turbines in the water going in and turbines in the water going out, will be about two thirds self-sufficient. At the moment we produce—and therefore do not need to buy—only about 5 per cent. of the energy we use. We are on our way to 10 per cent but, over the past year or so, we have been looking at the wider picture of our estate and whether we can use some of it for bigger wind farm activities. Of course, we would not use the output directly; it would go on the wires and we would take it back off again. We have identified half a dozen sites and, after advertising for partners in the Official Journal of the European Union, picked two preferred bidders for them. A lot of work now needs to be carried out to understand what the yield and so on might be. We talked to our owners last year about moving along that way, so I was delighted to hear last week that the policy of saying, “That’s a good idea and we’d like to do more of it,” is being endorsed. That was pretty good news.

As for the waste-to-energy business, I know that the convener has been to Cumbernauld—he gets around. We are having that opened by Cabinet Secretary Lochhead this month. We are in that in a smallish way and we have other ideas. Our owners are aware that we have been active on these things; we talked to them about our activities before the report came out and said that we might do more.

Richard Ackroyd might want to say something about the World Water Council.

We proposed a range of activities to ministers. Ronnie Mercer has mentioned renewable power generation and waste. I could also mention that we are starting to get some momentum on fibre optic cables in sewers as a business opportunity. Also, some ideas were mentioned in the First Minister’s speech that came from ministers or ministers’ advisers. I am talking particularly about the reference to setting up an institute that is similar to the Stockholm International Water Institute and about the Scottish Government bid to host the world water forum in 2015. We need to discuss those issues further with the Government so that we can put some flesh on the bones and work out exactly what it would like us to do.

Thank you. I come back to the question about prior notice or awareness that Scottish Water would come up in the legislative programme. I do not have his statement in front of me but, from memory, the First Minister sketched out quite a striking scale of ambition: Scottish Water would not only remain a public sector water company but become one of the largest renewable energy generators in Scotland. It would be a public sector energy generator on that scale. Were you given to expect such a scale of ambition? How realistic is it?

We have discussed how we become, if not quite self-sufficient, as close to it as we can get. Are we driven by the environment? Yes, but we are also driven by the electricity bill. We have the biggest electricity bill in Scotland and I have been pressing my colleagues to get it down a bit. Richard Ackroyd is still contemplating how to do that. It might be a property agent who is renting out land to someone, or someone might be involved in a power deal because they have given their land to someone who is making electricity; there are various ways that we can benefit from more electricity production, but the original idea was about knocking down our electricity bill and whether we could produce what we use, which is a lot more than we are producing now.

You have touched on one or two of the other issues that I wanted to raise, but I want you to say something about the practical implication of what the First Minister said. What legislative change or changes in Scottish Water’s management practice or staffing levels are needed? Do you have the skills already in place to begin to go down that route?

We already have expertise within the group, in our business Scottish Water Horizons, which is part of the non-regulated activity. It has expertise in renewable power generation and waste management; that is what it has been doing. It has also been doing the work on fibre optic cables in sewers. We will grow that business and its activity. It might well need more people to cope with a greater number of projects. We will deal with that.

Ministers have proposed some other activities to us, and we need to talk with them about the detail of what they envisage. That will start to tell us about the kind of expertise we need. I am mindful of the comment that Alan Sutherland made earlier: that it is important that we do not allow any of those activities to distract us from the focus that must be on the core water and waste water activity in Scotland. That will be at the forefront of our minds. We will ensure that we resource the proposals in a way that does not take skills away from that business.

As there are no further questions on the imminent Scottish Water bill, we will move on.

Why can some water companies in England and Wales charge less than Scottish Water charges?

There is probably one substantive reason. Two of the three companies that charge lower average bills than we do are Severn Trent Water and Thames Water, both of which serve densely populated areas. The cost per customer in such areas is very much lower than it is in areas with large rural populations such as we have in Scotland.

Is Northumbrian Water in a similar situation?

Northumbrian Water is interesting. Its area does not have the same density of population, but it has an enormous reservoir at Kielder Water and the available supply greatly exceeds demand. One of the factors is that Northumbrian Water has had far less need for investment in developing water resources than companies in most other parts of the country.

I thought that it would be useful for us to contemplate that. I understand the geographical factors.

Can you explain how Scottish Water calculates depreciation and how the total value of assets relates to the ability to borrow? I know that you had a lower surplus last year than you have had previously, but the issues about depreciation are tied up with our understanding of exactly what you make and what you have to spend.

Fundamentally, the business is financed and operated on a cash basis. That involves looking at the cash costs in a given year or regulatory period and the sources of cash. That is why on page 18 of the annual report and accounts we have a graph that shows the balance of cash in and cash out. That is the critical way in which the business is financed and managed.

Depreciation is in effect an accounting estimate that reflects the consumption of the underlying stock of assets in a given year. In our business, there are two elements to that depreciation. There is the element that relates to the infrastructure, which is generally the below-ground water pipes and sewers, and the element that relates to the non-infrastructure, which is typically pumping stations, water treatment works and sewage works.

We refresh the depreciation charge on the infrastructure element every four or five years to look forward to what we believe will be the long-run cost of maintaining that infrastructure in a stable condition. Part of the £28 million increase in that charge last year was a result of a reassessment of the long-term cost of maintaining that infrastructure. However, that does not affect in any way the short-term cash cost; it is very much a 20-year perspective.

The other aspect of the increase in depreciation, of about £34 million, was to do with the above-ground assets such as water treatment works and waste water plants. That reflects the fact that we have run a large capital investment programme over the past few years and a number of assets have completed construction and come into use. An example is the new water treatment works for Glasgow at Milngavie—a scheme costing more than £100 million that has now come into use. That is now an asset that gets depreciated for the first time. Such assets have added to our depreciation charge in the current year. The charge will continue to rise in the next few years as further assets come on stream, such as the Glencorse works outside Edinburgh.

I stress that the depreciation charge reflects the accounting presentation of our performance. What really matters in running the company, or in the way in which the commission regulates us, is primarily the cash flows that are associated with the business.

Talking of cash flows, you have had surpluses of up to £200 million in a year and the figure is probably more than £700 million over the life of Scottish Water. You have explained why that calculation is made. Do you see it as an asset to the company and that it can think of itself as cash rich?

15:15

Those surpluses are accounting surpluses. In effect, the cash that is represented by those surpluses has, every year, been ploughed in to part-finance the capital investment programme. If those surpluses from the cash-generating operations of the company had not been present, the amount that we have had to borrow would have been higher, the amount that we have invested would have been lower or customer prices would have been higher.

I am aware of the debates that we have had about those. Does Scottish Water expect to have to borrow in the commercial markets over the coming years? How would that affect the balances?

We would expect the water and sewerage core business to require borrowings as far as we can see, assuming that Scottish Water maintains a capital programme of any reasonable size. Where that borrowing comes from—from the Government or from the capital markets—is a decision for Parliament. We are no different from any other water company in the UK on that measure. They are all increasing their net borrowings every year—many of them are much more highly geared than we are—and that is the consequence of having large investment programmes such as the water industry has had for some years.

We understand that that will go on until 2027 and so on. Do you envisage that, as a water utility, you can ever become cash positive?

No. Not as a water utility.

So, as a public company, you will always be in the business of developing the assets.

There are choices concerning how we deal with what I will call a cash requirement. We can borrow, we can adjust the level of customer prices or we can seek to generate the revenue from other sources outside the core business. We can move any of those variables up or down. Some are easier to move than others; some carry political implications more or less than others. That whole issue will be a source of dialogue between us and ministers as we go forward.

Let us turn to another aspect of your accounts. Can directors’ salaries and bonuses be justified in the current economic climate? We know, from very public discussions, that we are talking about very large salaries and a bonus scheme that matches them. Can you tell us a bit more about that?

Sure. I will handle that question, as my colleagues do not decide their salaries and bonuses, although they earn their bonuses. As you are aware, the bonuses are paid on the basis of performance—we have discussed that before at great length. The salaries that they earn are based on an exercise that was undertaken using the Government’s advisers in order to get the best management we can afford and not lose them to others because what we pay is so far behind. That exercise was undertaken some time ago and the salary for the job was set before we knew which individual would be appointed. Richard Ackroyd got the job, but the salary was nothing whatever to do with him. The bonuses are intended to create success, and they are part of the company’s success.

The salaries and bonuses in Scottish Water are lower than those in the other 10 water and sewerage companies in the United Kingdom, and they are probably lower than those in the six electricity and gas companies. They were set to attract to the top jobs the people we need to drive a company with a £1 billion turnover and to keep the people whom we want to keep, although it is not always possible to do that, as people move on or get bigger jobs. The salaries and bonuses are now a lot closer than they were to those that the other companies offer but, of the 11 water and sewerage companies in Britain, they are probably still number 11. They look out of place in the public sector—I totally agree with that—but the company is not a typical public sector company; it is run as a business and it needs people at a certain level to make it run that way because of the complexities of it. It appears that whoever makes the decisions has been getting them right, because we are getting a reasonably successful company that, hopefully, is spending the money wisely.

You have been meeting performance targets. We understand why people receive bonuses in that situation, but do they receive bonuses even if you do not meet all your performance targets?

No. The targets are set by the regulator. If people merely hit all the targets, that is recorded in the regulator’s annual report and they get nothing at all in bonuses. If they exceed the targets—which does not happen in all cases—they earn bonuses for doing so. If they merely hit the targets, they get nil; they get their money for the steps after that.

It is handy to have that explanation. Given the tight state of finances at the moment, do you think that salaries and bonuses of this sort are justifiable?

I totally understand what people think when they read about them, because they look out of place in the public sector, but they do not look out of place in the private sector. You might say that Scottish Water staff are not in the private sector, which is true, but we are asking them to imagine that they are and to run a company as if that were the case—those are the ready instructions that you give us. The approach is working and it is part of the success that we are having at the moment.

Given that there may be shrinkage in the money that is available from the public purse, will there be cuts in staffing or operating costs? Will there be cost cutting at the top, or are staff likely to be removed?

We are given targets for capital efficiency and operating efficiency that are quite stringent, to say the least; I do not yet know exactly how we will meet them. Those targets have to be achieved over five years. I will ask Richard Ackroyd to comment, as he has the job of meeting them.

One of our core principles is that we should reduce the cost of providing the water and sewerage service year on year. The Water Industry Commission sets us some challenging targets. Even if the commission did not set us such targets, that approach is ingrained in our psyche and the way in which we run the business.

In the previous price determination in 2010, the targets that the commission set us for the period up to 2015 were, in round numbers, a 10 per cent reduction in operating cost and a 15 per cent reduction in capital cost. In practice, that means that for each 100m of water main that we will lay in 2015, the cost will have to be 15 per cent lower than the cost of laying 100m of water main in 2010. That is baked into the price settlement. If we do not achieve the targets, we will find that we underperform the price determination. Conceivably, if we are far enough behind, we may run out of cash to run the business.

The name of the game is to make things more efficient. We go at that in a variety of ways. We are running a substantial number of what I will call change programmes or change initiatives in the business. Those include finding ways of working more efficiently with contractors—removing the duplication of cost that arises when you manage a contractor or other parties in the supply chain—and completely redesigning some of our internal business processes. Earlier, there was discussion of customer connections. We are redesigning the customer connections process with the objective primarily of improving the customer experience but also of reducing the cost of running the business.

There are numerous examples of such initiatives. Technological change is another. In the past two years, we have set up a team in the business that is focused entirely on finding innovative ways of doing things. Some of those involve technological innovations, whereas some involve innovation in how we run the business. For example, we are trialling a technology that would seal leaks in pipes from the inside, by injecting into the water mains little plastic platelets, as they are known, that find the leak and fix it. That is a much cheaper operation, with no disruption to the customer or digging up of highways. There are various pump technologies to make pumps run more efficiently and effectively. We are always looking at that kind of thing. Finding ways to run the business more efficiently and effectively is how we earn our bread and butter.

I mentioned staffing. Is it likely that there will be a reduction in the number of your staff? I am well aware of the thin blue line in the area where I live.

Sure. We have been reducing the number of staff in the business every year since Scottish Water was formed. We expect that, by the end of this year, there will be somewhere between 130 and 150 fewer people than there were at the start. The language that I use when I talk to people in the business about the situation is that we are committed to doing this in a civilised way. It is all done through voluntary schemes, taking opportunities not to fill vacancies and redesigning business processes to cope with it. That is how I envisage we will carry on—every year we will find ways of getting more efficient.

I will follow up Rob Gibson’s question about salaries and other payments. One of the reasons extreme salaries are a matter of public concern is not just what is happening in the rest of the public sector but what is and has been happening in the whole of society for a number of years, including in the private sector, which is the increasing gap between rich and poor and what that says about the values of our society. The same questions could reasonably be put to private sector organisations, which are responsible for spending their customers’ money, whereas in Scottish Water’s case it is public money, although it does not come directly from taxation. You acknowledged that Scottish Water has a sense of responsibility for those kinds of issues. Several political parties have at least talked about adopting a maximum wage ratio policy between the highest and lowest paid in an organisation. What is the maximum wage ratio in Scottish Water?

It is about 1 to 20.

Are you comfortable with that or are you looking to bring it down?

I am not making a value judgment about it; it is for parliamentarians and politicians to do that. If there were legislation about it, we would take account of it. We operate in a marketplace of people. We are conscious that we have to pay enough to get good people, but we certainly do not want to pay more than we have to for appropriately qualified people. We are always working with that dynamic. It is not just about how much people at the top of the organisation get paid as against those right at the bottom. We do not have what I would call low-paid people in Scottish Water. We are not a minimum wage type of organisation.

Does the ratio of 1 to 20 include cleaners in your offices?

We do not employ cleaners, because that work tends to be contracted out.

The ratio would be more extreme if you did.

No, the lower-paid roles in our organisation are predominantly in the call centre.

My point is that lower-paid roles have simply been moved to another organisation.

I am not going to debate whether it is right to have a wage ratio of 18 to 1, 20 to 1 or 22 to 1. We operate in a marketplace. There are always occasions when we have to respond to the marketplace. Sometimes we have to pay more. In the north-east of Scotland, for example, we compete with the oil and gas industry for people with electrical, mechanical and IT experience, and that is an issue for us. There are other occasions when we find that the market for some skills has moved the other way and we can employ people at lower wages than previously. That dynamism will always be with us—we cannot escape it.

I would like to hope that anyone who was not utterly ideological about such questions would say that we operate within a marketplace and within a society and that those things need to be kept in balance. Do you agree with that?

15:30

Certainly, although what “in balance” means is subjective. If you compare Scottish Water with a number of other water companies, you will find that the ratio in Scottish Water is a lot lower than it is in many other companies.

There are no further questions on finances, so we will move on.

Gentlemen, the regulator judges Scottish Water’s performance against an overall performance assessment—the OPA—which comprises 12 indicators. In the year under discussion, you achieved a combined total of 291 points on those indicators, beating your target by about 21 per cent. However, by 2014 the regulator wants you to achieve a score of around 380 to 400, benchmarked against the top-performing water company south of the border. Which of the 12 indicators is your lowest scorer currently and which areas need additional effort if you are to match the top performers by 2014?

The area where we need the greatest improvement is reducing the number of environmental pollution incidents.

When you compare last year’s performance with future performance, the other aspect to consider is that two other changes are being made. Three new measures are coming into the OPA basket for this new period, one of which is to reduce the number of pollution incidents. The others are to do with security of water supply and assessed customer service. There is also a change in how the measures work, particularly in relation to water quality. Whereas, historically, we have scored very well on water quality, the way that that will be assessed in this new period means that we have further to go. We have work to do across environmental pollution, security of supply and water quality. Even in areas where we have done well in the past, there is still scope to get better, such as on managing unplanned interruptions to customer supply and taking more customers off the low-pressure register for water supply.

So, how sanguine are you about getting up to 380 or 400 points by 2014?

We are not at all sanguine. We regard that as a very challenging target. We have developed plans, so we know what we have to do and we know something about how we think we will do it, but sitting here and saying that is different from doing it. We are not at all sanguine about it.

There is quite a big risk factor on the OPA measure. We have a number of large sewage treatment works across Scotland, many of which are operated on our behalf by others. If one of those sewage works fails its discharge consent in any one year, we lose somewhere around 40 points. You will see that that could quite easily make the difference between just passing and failing by a very large margin against those targets.

I will ask you something that I asked the regulator. Is there any aspect of the approach to targets that you feel creates a danger that the law of unintended consequences will kick in? We have seen that before in the health service, where people become focused on targets and perhaps take their eye off other things that are not necessarily linked to the targets.

I listened to the earlier evidence. On the bonus question, on which Rob Gibson correctly pushed us, Scottish Water hit the extended target on the OPA tick box, but it did not hit it on the output delivery measure. They are two separate things: one is what the customer sees and gets and the other is whether we got the outputs right at the right time and at the right cost. In the bonus system, Scottish Water got one and not the other, which tells you that it works. Just because it got one, that did not mean that it got the other. The system is intended to make you get both, but the organisation failed on one of them. I do not know that the targets are a distraction in any way, but different measures matter. I do not think that there are any unintended consequences—you tell me.

The OPA now contains 16 measures that cover a range of water quality, customer service and environment issues, on all of which we need to improve. I think that the OPA now reflects the balance of things that matter to customers—

Does the OPA now have 16 measures? I mentioned 12 indicators in my question and you mentioned three new indicators.

Sorry, one of the existing indicators was split into two.

I see.

We have wrestled over the past few years with how, in delivering a five-year capital programme, we can get an objective measure of whether we are on target, especially when we are midway through that programme. Clearly, spending the money is not necessarily a good proxy for achievement. Over the past 12 months, we and the Water Industry Commission have wrestled with that issue and we have come up with a new measure—the overall measure of delivery. I do not say that the OMD will be perfect, but we have together endeavoured to stress test it by looking at the what ifs. What if the programme is way off track in this or that area? What if we are ahead in some aspects and behind in others? Does the measure produce perverse results that could cause unintended consequences? I cannot guarantee that any new measure will not do that, but between ourselves and the commission a lot of work has gone into stress testing the OMD to try to ensure that it provides a reasonably objective measure of performance on capital delivery as we go through the five years.

You will concede, gentlemen, that those agonies are not fully reflected in your annual report.

That is an interesting observation.

However, we have got it out of you today.

Indeed.

If there are no further questions on targets, Alasdair Allan will move us on to the next issue.

We have already touched on Scottish Water’s environmental commitments such as on leakage, which it is fair to say improved last year as compared to the previous year. Mention has already been made of how realistic the targets are for Scotland’s sewerage system. How realistic are the targets for reducing leakage to less than 500 million litres per day by 2015?

Our target is to reach the economic level of leakage by 2014. The figure for the economic level of leakage changes over time, depending on issues such as the relative demands that are placed on our system, and varies from zone to zone around Scotland. After we accepted the commission’s final determination, we set out in our delivery plan our current view that the economic level of leakage is probably about 612 megalitres a day. We have an agreed programme with the commission to work together to get a better understanding of that as we go forward, so that number might change. However, our current view is that the figure is probably closer to 600 megalitres per day than 500 megalitres per day.

You mentioned the variation in different parts of the country. Why is there variation? What are you doing to try to overcome it?

The level of leakage is driven by a number of factors: the state of the infrastructure, which is better in some parts of Scotland than in others; the impact of ground conditions, in that some ground will dry out and get wet more quickly and move more, which puts a strain on the pipes; and even the nature of the water, in that water of a more acidic nature, such as from moorland sources, can corrode the pipes. Another factor that we are thinking about—it would be wrong of me to say that we are 100 per cent on top of this yet—is that the best way of achieving the economic level of leakage might be to drive really hard in some parts of Scotland and less hard in others. In particular, we need to bear it in mind that driving down the level of leakage is one of the best ways of addressing potential supply/demand imbalances. As we get more sophisticated at doing that, we would expect to be actively managing the situation so that we would have different levels of leakage in different places for good reason.

You mentioned the different types of pipes and environments. I am often asked how much asbestos or clay piping still exists in Scotland. Can you tell me?

I cannot give you a straight factual answer to that; we would have to follow it up. There are still asbestos pipes in the network, and a lot of research has been done about the implications of that and the best thing to do about it. It is an issue that the industry is addressing, but if you want a precise figure, we will have to send it to you later.

Does WICS’s function as an economic regulator constrain Scottish Water’s implementation of sustainable solutions that are more costly in the short term?

Historically, it has been up to Scottish Water to put together a business plan setting out what we believe are the resources that we need to run the company and deliver services to customers while making the improvements that are needed in order to deliver ministerial objectives. Therefore, the onus is primarily on us to develop the most appropriate solutions, given the improvement challenges. In general terms, the solutions that we have put forward have been ultimately supported by the commission, although it has often not supported us with regard to the amount of money that we have said that those solutions require.

Mr Sutherland alluded to the dialogue that we have started to have about the approach to the price review from 2015 onwards. We are starting to think about how we can introduce mechanisms that will enable us to promote investment that will deliver environmental benefits, even though they might take longer than five years to pay back. That is a rich vein to explore.

How do Scottish Water’s greenhouse gas emissions compare to those of other industries in Scotland, and what are you doing to reduce sewer infiltration?

I am not sure that I can tell you how we compare with other industries in Scotland. We have focused on being able to measure our own greenhouse gas emissions, and the report contains information on that. We are encouraged by the fact that, in the last year for which figures are available, there was for the first time a reduction in our greenhouse gas emissions. We are pleased about that because, year after year, the whole of the industry, including us, has been building new treatment plant that, by and large, has to be energy intensive in order to meet the water quality and waste water standards that legislation requires us to meet, and that has been driving up our greenhouse gas emissions. None of the counter measures that we have put in place previously have been enough to address the increase but, for the first time, we have seen a modest decline. Clearly, our aim is to keep on top of that and keep driving emissions down.

In order for us to make a real dent in our emissions, two things must happen. First, we must increase the proportion of renewable electricity that we use; and, secondly, society, policy makers, Government and legislatures are going to have to give some thought to how to balance out the issue of greenhouse gas emissions with the issue of environmental impacts in other parts of the environment. The issue is particularly graphic in our industry. Is it right that we should continue to build ever more intensive sewage treatment processes to deliver a marginal improvement of water quality in a river if that comes at the expense of increased greenhouse gas emissions? How can we make those balances and trade-offs? That is where the debate needs to go in the coming years.

That is interesting; we can follow up on that.

Metering has the potential significantly to reduce water consumption and I understand that £7 million has been earmarked for metering trials. Why have you allocated that amount and not more or less? I am particularly interested in why you have not allocated more. Also, why are Scottish Water’s costs for metered water higher than those elsewhere?

15:45

I will take the questions in reverse order. We have very few meter customers: we have about 2.4 million unmeasured household customers but only around 600 metered houses. It costs more to supply metered than unmetered households simply because of the cost of installing and maintaining the meter, reading it and sending out the bills.

I turn to the metering trial. We are working with Government officials, the Water Industry Commission, the Scottish Environment Protection Agency and Waterwatch Scotland to explore the nature of a trial—we are looking at testing a number of different scenarios. We are in the process of working up what the trials might look like, with the intention that a plan will go to ministers for their approval by the end of this financial year—March 2011—which is the objective that they have set us.

My question follows on from Marlyn Glen’s question on climate change and Alasdair Allan’s question on leakage. Both those sections in your annual report say what the figure has gone down by, but not what it has gone down from or to. I am sure that that information is readily available, but I wonder whether it would not have been appropriate to include it as context. I appreciate that more information is given this year but, for example, anyone reading the climate change section will see the percentages indicated in the footprint and would see that there was a reduction of almost 10,000 tonnes of CO2 equivalent, but would not be able to put that information into context. Similarly, anyone reading that there had been a reduction of 99 million litres a day would not be able to put that into context unless they knew that the level had gone down to 704 million litres a day, I think that is the figure—

On leakage?

Yes.

It is. I think that the figure for the previous year was just over 800 million litres.

Yes. It has come down by 99 million litres.

Knowing that it has come down by 99 million litres makes sense only if you see the other figures.

I am sure that we can do that.

I assume that we can also do that next time for greenhouse gases.

Thank you.

I return to the issue of compliance. Under the waste water quality targets, I was interested to see that you managed to reduce the number of unsatisfactory intermittent discharges by 102. Your target was significantly higher, however. It looks as if about 143 unsatisfactory intermittent discharges still need to be improved. What are the problems in doing that? How do you intend to address the problem?

Are you referring to page 11 of our annual report?

Yes.

Originally, the number of discharges that were expected to be improved as part of the quality and standards IIIa investment programme was 277. As we did studies in each of the catchments to look at what was required, the figure went up to 307. We delivered 264 of that total by March 2010—in effect, we have about 40 to go. Some of the discharges are complex. It was important to identify absolutely the investment that was required. In that way, we ensured that the investment was targeted appropriately.

The single largest scheme that remains to go is in the Meadowhead and Stevenston areas of Ayrshire. A scheme is about to launch there to address the unsatisfactory intermittent discharges in the area. We have one or two others, but that is the single biggest scheme to go. The key thing was to ensure that we did the study work in order to target appropriately the investment.

That makes sense. We know from the report and from earlier reports that you have already invested more than £200 million in improving the quality of drinking water. You have indicated that you intend to spend another £20.5 million on improvements in that area. Can you tell us where those will be targeted?

Can you give me the page reference? We have a large water quality improvement programme as part of the new regulatory period, so I want to be clear on the context.

I cannot give you that reference right now. Can you talk about your improvement programme for the current session?

There are two major chunks. One chunk consists of the one or two large schemes that are part of the overhang programme that we discussed earlier. The largest of those schemes is the new Edinburgh water treatment works at Glencorse, which is just up the road from here, and there is another one at Aviemore. We have a handful of those large-ish schemes that we intend to finish off.

In the programme that started in April this year, the biggest single water quality improvement issue is around small treatment plants, particularly in the Highlands but also in one or two other rural areas. We are working to reduce the risk of cryptosporidium contamination. Those plants tend to be small membrane treatment plants that might be serving a community of a few houses that has had very rudimentary treatment until now.

I want to raise the perennial matter of the Seafield works in Edinburgh, which was a very big job. Where are we at with that just now, given the number of years that it has taken to reach the stage of dealing with the situation?

I assume that you are referring to the odour issues at Seafield.

That is correct.

There has been significant improvement in the plant’s operating performance, particularly since Veolia Water took over the management following its acquisition of the private finance initiative contract.

The capital investment upgrade is a two-year programme: we are now slightly over halfway through it, and we expect it to be completed by spring 2011.

That could be good news for tens of thousands of people in Edinburgh.

As I—and my parliamentary colleagues, I imagine—go about the doorsteps, I find that the world can be falling off a cliff but people still want to talk about the state of the roads. Being a politician I am always looking for someone other than myself to blame, and I see that the Scottish road works commissioner has decided that I should blame Scottish Water.

The commissioner’s annual report for 2009-10 says that 86 per cent of the temporary reinstatements on Scotland’s roads that are more than six months old are down to Scottish Water; and that the quality threshold of the reinstatements that are undertaken has fallen, as at present only about half of those repairs are acceptable.

I remember the chairman of Network Rail being lambasted for not getting his overalls on during his holidays to go out and personally fix the railway lines. I am not suggesting that you go out with a bucket and spade to do the work, but are you the guilty men?

Mea culpa. No, to be serious about it, I absolutely agree that that matter, and the state of the roads in general, is a big issue from a customer point of view. The road works commissioner is a relatively new creature, and it has been a very effective appointment because it has shone the spotlight on that area. We must acknowledge that we have a substantial way to go to improve on that.

We are not at the starting line: we come from a position in which the water industry in Scotland—Scottish Water and our contractors—accounts for the greatest number of highway excavations. I say that to provide some context; it is not an excuse at all. To provide further context, I understand that the road works commissioner has issued letters to all the utilities in Scotland requiring action plans for improvement. We agreed an action plan with the road works commissioner a few months ago. As of today, we are ahead of the interim targets that we set in that plan.

Which would be what?

There is quite a substantial number of them. They are around issues such as the quality of reinstatements, core samples and the proper following of noticing procedures.

I think that the issue is one on which we will make progressive improvement. It is not one that will be solved overnight, but by the time the commissioner publishes his next report, you will see some improvement. We will get better faster. I say that because in addition to the programme of surveys of reinstatements that the commissioner carries out, we do our own with our contractors, and we are already seeing substantial improvements in the percentage of reinstatements that meet the standards that are required. In the most recent period that we measured, one contractor hit a rate of 100 per cent. I am confident that performance is getting better, but it will take time before it becomes good enough.

I am interested in the role that the Scottish road works commissioner has played. Was all this unknown before? Was it below the radar? Was a perceivable level of complaint and public concern being expressed? You say that there is now a focus on the issue, as a result of which some negotiation is taking place around the measure of improvement that should take place, but what was happening before? Why was the matter not dealt with effectively?

It would be wrong to say that the quality of reinstatements was an invisible issue and that no attention was paid to it. That would not be true. We deal with customer complaints, we carry out customer surveys and we address such issues on a one-to-one basis with the various roads authorities. However, I think that it is a truism that in a business such as utilities, if a regulatory body shines a spotlight on an issue, it generally causes people to pay more attention to it, which results in performance improvement. That is what has happened in this case, and that is a good thing.

I would like to ask a question on insurance policies, which I pursued earlier. If you were sitting in the public gallery, you will no doubt have heard the concern that I expressed, which was about the extent to which insurance policies are an aspect of your business, the extent to which such policies are necessary and the extent to which they are understood, particularly by elderly people, some of whom have brought the issue up with me on doorsteps after receiving offers of such insurance. I have been unable to give frank advice, other than to tell them to check their domestic insurance policy in the first instance.

To what extent has that become an aspect of your business?

Insurance policies represent a valuable but modest source of non-regulated income. We get somewhere less than £1 million a year in commissions on the premia that are paid on those policies.

The overall context is that, as with many products of such a nature, a proportion of people find them irritating, do not like them or get confused by them, but the feedback is that a bigger proportion of customers value them. We are not unique in offering such products. The product in question is a HomeServe product. That company’s main channel to market has been through marketing in association with utility companies. You will find that pretty much all the utilities market such products alongside insurance companies.

It is an activity that is very heavily regulated through the insurance market’s regulatory mechanisms, which pay attention to the clarity with which information is conveyed to people. There are all sorts of rules about misselling and all that kind of thing, and we and HomeServe are obviously extremely careful to avoid falling foul of any of those.

Okay.

Are there any further questions for the panel?

I have a stray question that I could not fit in earlier. Waterwatch Scotland produced a report last month on the introduction of competition into the industry. The report raises concerns about the idea of deposit requests. It says that in future,

“Business Stream ... intends to apply a condition from its current Terms and Conditions more strictly”

than has been the case in the past,

“which would see a number of its current customers having to provide a deposit for water charges. Failure to provide this deposit will lead to Business Stream disconnecting their supply.”

What is the scale of that? What percentage of the overall bill could the deposit be? At the moment you are still in almost a monopoly position, in that you are providing more than 90 per cent of the business. Does that disadvantage local businesses at a time when they are struggling to deal with costs?

16:00

I cannot answer that point properly, but we are referring to page 15 of Waterwatch Scotland’s report, which I have in front of me. It does not provide the figure, so I cannot quote it, but Business Stream has put a £75 charge on people who continually do not pay their bill and have to be chased for it. That is a penalty for not paying.

I will make a wider point, since you have brought up the Waterwatch Scotland report, which purports to be a competition report. It concerns a number of complaints, which come to less than 1 per cent of the entire number of business customers. In the past year £90 million of business has been openly tendered among the five companies—I think that Jackson Carlaw mentioned the same point earlier. That is a quarter of the entire business in Scotland, which is a total of roughly £350 million a year—£90 million coming to 25 per cent in round figures. That was tendered openly to the biggest companies that you could think of. I will not name them because of commercial confidentiality, but some of them are drinks businesses, some of them are in the oil business and some of them are paper mills. There is not one single mention of the fact that 25 per cent of the entire business has gone out for open tender in something that is called a competition report.

Right now, £75 million is out to tender for public sector work. That is nearly another 25 per cent—it is twenty-something per cent. There is no mention of that in the report, either. That will be decided during this calendar year. That is not in one chunk of £75 million, but in three packages of £25 million each. Losing any one of those means losing something like 7 per cent of the business; losing the three packages means losing twenty-something per cent.

I do not put much faith in a competition report that does not mention any of the competition that has actually been going on. I am not a politician—I took a chance to say something because I got a door opened.

I will come back to your question, Alison, on the matter of the £75 that is being charged to people who do not pay their bills. That is intended to be an incentive for people to remember to pay bills. Business Stream has a lot of problems with people who either do not pay or do not indicate that they are there—vacant sites that actually have folk in them are sometimes discovered. Mechanisms have to be put in to force the position. It is not that Business Stream is trying to screw the country further. In the time that it has been in place it has taken 20 per cent out of its cost base; 40 per cent of customers are now paying less than they did before and, by the end of this year, 50 per cent of customers will be paying less than they did before; £9 million has come back to Business Stream in efficiency savings. A lot of things are good about competition, too, but I cannot tell you the exact figure that you seek, as it is not in the Waterwatch report. I will come back to you on that.

I do not doubt that you need to protect your revenue, but I do want to see the figures, so it would be helpful if you could provide them in writing.

We will get them for you.

I thank you all for the time that you have spent answering our questions.

16:03 Meeting continued in private until 16:08.