Official Report 446KB pdf
Good morning, everyone, and welcome to the 23rd meeting in 2013 of the Infrastructure and Capital Investment Committee. I remind everyone present to switch off mobile phones and other devices as they affect the broadcasting system, although some committee members may consult tablets during the meeting because we provide papers in digital format.
I declare that my son works for a company that is involved in the Thistle Water consortium. He has no knowledge of and no involvement in the working of Thistle Water, but I thought it prudent to bring that to the attention of the committee and witnesses.
Thanks very much, Mary.
Yes, I will make a few remarks if that is okay. I will get us warmed up and going and will give you something to ask us about.
You can whisper. [Laughter.]
Thank you for that brief introduction. Can Scottish Water continue to provide the cheapest water and waste water services in the UK while mantaining the necessary levels of investment in the water and sewerage networks?
It is our intention that our bills will remain in the lower quartile of bills in the country. I cannot say whether ours will be the lowest, as someone else might pass us from time to time, but we expect our bills to remain well below the average bill in England and Wales and to be among the lowest. Right now, they are the lowest, but we would not make incorrect decisions in order for them to stay there or for the sake of £1. Douglas Millican might want to expand on that.
There are a number of different dimensions to the issue, which plays into the future discussion of the strategic review. Our plans for the future are very much informed by what customers have told us matters to them—their expectations of service levels and service improvements and what they want to pay. Our plans for the future are geared to delivering what our customers want. As Ronnie Mercer said, we expect our bills still to be significantly below the average and among the lowest, but they may not be the lowest. That is no surprise given the geography that we cover in Scotland compared with the geography that is covered by some of the companies in England. It is no coincidence that the company in England that has the lowest bill has probably the greatest concentration of customers in the English midlands.
You mentioned that there have been recent bursts as a result of dry weather. Thank goodness that we have had dry weather for a change. Has that exposed pipework, so that greater investment is required to replace older ware and works more quickly? Is the pattern of investment such that you can keep the water flowing as it is, or would you like to increase the level of investment?
No, I do not think that we are looking for any more investment. It is really about clever investment. If it was just a case of repairing the oldest pipes, it might be easier to know what to do.
There is no real correlation between the age of our pipes and their performance or the number of bursts. In those particular cases, although they were all very old pipes, when we took them out to repair them they were all in very good condition.
As there are no further questions on pricing, we move on to Scottish Water International. According to your annual report and accounts, Scottish Water International has won contracts in Qatar, India, New Zealand and Poland. How do you see that part of the business developing?
I will ask Douglas Millican to say whether there are any plans for the future. We have found it quite an interesting thing to do, and it is making good use of our people. It is giving them a view of the rest of the world and getting our name known elsewhere, which is no bad thing.
Last year was the first full year of Scottish Water International and it was quite a successful year. About 13 staff worked on location throughout the year, principally in Qatar. We also had a member of staff out in New Zealand on a fairly long-term basis and we had some shorter contracts elsewhere.
I am trying to find out how much income International generated in its first full year. I cannot remember where I saw that.
In terms of appropriate opportunities for us, I do not believe so. We actively scan many opportunities in different countries, and a number of those take a significant time to come off. There are also many parties that are keen to tap into our expertise without paying for it. The trick is to ensure that if we provide real value we get remunerated for it.
How do you see the business developing in the next few years?
As Ronnie Mercer mentioned, in the past six months we have pulled together a pool of what we refer to as designated consultants. Those people have a day job in Scottish Water but are willing and keen to work with us in an international capacity. We have selected about 30 such people who have skills in areas in which we believe there might be a market demand. We are training them as consultants because more skills are involved in being a consultant than in being a technician or engineer. When opportunities come along, they will be ready to be released to provide support.
It is important to say what we are not doing, convener. We are not into building, owning and operating something that we have paid for in the middle east. We are not doing that because it would be gambling with the public’s money. We are supplying expertise to a project that is funded by someone else, and we are putting that expertise into it because we have it and we are using it here. Our work in Qatar is a classic example of that. Qatar has the world cup in 2022, but it does not really have a sewerage system, as you and I know, so we are helping to design one. We are not building things and then hoping to get paid for them—I want to be clear about that. We are a consultancy; we are not a build-own-operate organisation, and we do not want to be one.
What is the split between helping with the design of things such as sewerage systems and dealing with water governance issues such as those that you are pursuing in India?
Most of the work that we have done that has generated value is associated with supporting Qatar’s public waste water authority with the upgrading of its waste water management system and the delivery of customer service around that.
Mary Fee would like to ask some questions on Scottish Water Horizons.
Your annual report indicates that Scottish Water Horizons is withdrawing from the green waste and composting business. Can you give me a bit more detail about the reason behind that decision?
It was very much a function of market conditions and what we experienced last year. The sales value per tonne of waste that was available to the market meant that it was not economic for us to continue with that. We are therefore gradually withdrawing from that sector, although we are honouring the contracts that we have. Clearly, we will have the facilities and capability that mean that, if market prices rise in the future and it makes sense for us to get back into that business, the opportunity will still exist. When we are operating in a competitive market such as the waste sector, where there have been quite significant changes in the market prices over time, we absolutely have to respond to those market opportunities and threats to maximise our financial position.
So was a loss made? Is that one of the reasons why you are withdrawing from that market?
Absolutely. Last year the prices that we were able to achieve in that market were not sufficient to cover our costs, so it did not make sense for us to enter into further contracts if we could not make an appropriate return.
From what I hear, the green waste and composting business is growing. Has it become more competitive?
Absolutely. The tonnage that is available in the market is increasing, but so is the competitive activity, because the market has fairly low barriers to entry and it is easy for new entrants to come in or for existing businesses to expand. Over the short term, that has driven market prices down to a point that means that it is not economic for us to continue in the market at the current time.
If you have made a loss, have you had to move funds from another part of the business to cover that? If not, how will you manage the loss going forward?
It is all covered by the financing within the Scottish Water Horizons part of the business, so there is absolutely no crossover into the core, regulated part of Scottish Water.
It is perhaps worth saying that Scottish Water is still involved in energy.
Absolutely. Scottish Water Horizons is very much focused on generating energy from hydro and wind, and from food waste. We have a food waste plant in Cumbernauld, which in itself shows the vagaries in the market, because market prices have fallen but they are now starting to rise again. We must just accept that such markets have both opportunities and challenges, depending on what is happening with market pricing.
The site that we use for waste energy is the same one that we have used for green waste, so we are still in the same place.
Will you continue to operate in competitive markets that are not part of your core business, or will you gradually withdraw and just focus on your core business?
It is very much about being opportunity led. Our whole growth strategy is predicated on looking at the resources that are available to us and seeing where there is a market opportunity that will mean that we can add value to help customers and to make money.
Mr Millican, I think that you said that there was no crossover into the core business of Scottish Water. Does that mean that there is no knock-on effect for customers and taxpayers?
Absolutely.
How much was the loss that was incurred? Can you put a figure on it?
The operating loss in Scottish Water Horizons last year was £1.6 million.
My colleague sought to understand what the impact of refocusing the business would be. How do you absorb that type of cost?
We generate surplus over time across the range of our non-regulated activities. It is in the nature of any business that there will always be streams that are profitable and some that can struggle. We must therefore build up reserves over time across the portfolio that can enable us to absorb any shocks that come along.
Does that impact on the profitability and commercial viability of the non-core business?
No. We expect that Scottish Water Horizons will be a profitable activity this year.
Mr Mercer, you referred in your opening statement to the difficult economic conditions that caused some non-payment difficulties, particularly for Business Stream. How is Business Stream supporting customers who are having difficulty in paying their bills?
The answer is that we are doing that in a lot of ways. I will ask Mark Powles to talk about them.
We recognise that the past few years have been difficult. We obviously have a responsibility to get payment for the services that we provide, but we try to be sensitive with customers where possible. For example, we can issue payment plans for them; if a reassessment can be done to move them from unmeasured to measured, we will support them in that; and we will sign customers up to direct debit where possible so that they have more visibility and regularity of payments. It is a difficult time for businesses, but collecting the cash for the services that we provide is essential for the viability of our business and to ensure that Scottish Water gets the wholesale charges that it needs.
Has there been a particular effort or exercise to identify companies that are connected to the water network but have not been identified by Scottish Water as having an account and are now being retrospectively charged for activities?
The regulator has put in a series of incentives and penalties for the industry, which means that we have a responsibility to identify customers and bill them for services from the point of occupancy. In the main, that has generated charges for customers who were not on a database and customers who have not told us that they have moved into a property. That is one of the most difficult issues. If a customer tells us at the point when they move in, we can issue the welcome pack, start to bill them and ensure that they get maximum value. Unfortunately, not all customers do that, so we have to go and find customers who have moved into properties.
Just to clarify, it is the regulator that imposes on you the requirement to back bill.
We have to bill from the point of occupancy. When a customer moves into a property and starts to receive services and use water, I think that, in the main, it is fair that they should pay for that. The problem that we have is that, on quite a few occasions, customers do not tell us when they move into a property, so we have to go and find them, and then find out the point at which they moved into the property and bill them accordingly. We are reviewing the policy at present with the market, and as soon as we have agreement on that I will be happy to write and give you the details.
It would be good to hear about that. I have a couple of examples from my constituency: a charity-owned community centre and a church that occupies a building in the town centre have been back billed, and, as a result, the community centre has closed while the church is now struggling to pay its bills.
Charities specifically are a difficult issue. As you know, an exemption scheme is in place, but the rules are fairly rigid. When we identify a charity that has not been paying for services, the first thing that we proactively encourage it to do is to look at the exemption scheme to establish whether it would be eligible. In some cases, we have been able to do that.
My next question is on your plans to expand into the English deregulated market. Could you outline how you plan to progress that expansion and say whether there will be any impact on Scottish customers?
First, to be clear, our focus at present is very much on serving Scottish customers in our core market. That has, as Ronnie Mercer said at the start of the meeting, delivered fairly significant benefits to customers. Almost 70 per cent of the market is now benefiting from lower prices. We have saved more than £35 million in consumption savings and developed a suite of more than 60 innovative added-value services that are reducing carbon impact and improving environmental things for customers.
Why was the Scottish market opened up before the English market? Why do English companies find the Scottish market attractive to come into?
I started at Scottish Water after the Water Services etc (Scotland) Act 2005 was passed to open up the market in Scotland. Perhaps my colleagues can answer.
The act was passed to open up the market in Scotland. I came to Scottish Water in 2006, when one of my first instructions was to make that happen. As per the regulatory compliance arrangement that we must follow, we separated out Business Stream. We have opened up the market and gone for it. England did not do that and it does not intend to do it until about 2017, so English companies can come here but we cannot really go there. Hardly any of the market there is open and none of it has really changed hands.
The convener asked why people are coming up here. The success of the Scottish market has started to make the Westminster Government think that opening the market is a good idea, which is why the Water Bill is going through the UK Parliament to open up from 2017 the English market, which involves about 1.1 million customers and about £2 billion of income. In the knowledge that that is to come into the English market, a lot of companies are taking the opportunity to come to Scotland to learn about competition and how to be a retailer.
Are the opportunities lucrative because companies do not have to do waste water or for other reasons?
The opportunities are lucrative in Scotland and not very lucrative in England. Today, the market in England is open only to 27,000 customers—those that use more than 5 megalitres of water on a single site—out of 1.1 million. That market opened up in early 2003 and has had limited movement from customers switching suppliers.
Post-2017, are the markets and the regulatory regimes likely to be the same? Are the profit margins in Scotland and England likely to be the same?
It is fair to say that a lot of the policy is still emerging. It is important to make the distinction that we have two separate markets that are run by two separate regulators under two separate Governments. The challenge, which we are trying to meet, is to create a seamless customer experience. We want multisite customers that have cross-border branches and outlets between England and Scotland to be able to contract with one supplier, to get one bill and not to see the join between two separate markets. However, the characteristics of the English market are slightly different. Its price review process is through its regulator. That could have an impact on pricing and price structures. Where possible, we are trying to create a market in which the customer experience is seamless, but they are two separate markets.
It is fair to say that Mark Powles is helping the English market. He gets to meet the Department for Environment, Food and Rural Affairs because we have been at it for five years and the English have not got there yet. We are trying to get our views across as best we can through him. He has an important role to play because, five years later, we know a lot more than we did and DEFRA wants to get every bit of information that it can to help the English markets to open up seamlessly. We are trying to influence it a bit so that it is as level as it can be.
In your opening remarks, you said that Business Stream was helping people to use less water and, therefore, pay less. However, in my experience, that is not really true, because a company can have two people in an office using a kettle, the toilet and sink once or twice a day and pay a hell of a lot for its water. The cost is based on the size of the premises and the number of rones, downpipes and drains that they have rather than how much they use. Scottish Water does not repair the rones or the drains or even empty the drains. That is the council’s job. Many people are very confused about how much they are paying for water when they know that they are using very little. Will you explain it in words of one syllable?
I suppose that the easiest way is for people to understand the rules of engagement in the market. A wholesale price is created as the result of a negotiation between Scottish Water Wholesale and the regulator. That creates the price at which I have to buy the services for the customer. There is also a default retail price, which is the maximum that I can charge the customer for the services that we provide.
Mark Powles has an engineering solutions team that goes to sites—not to corner shops—and finds out how the companies could use less water and reduce their effluent discharges. That is for more commercial and industrial customers rather than those on the high street, for example.
Mr Mercer, we heard in your opening remarks about the target for the overall performance assessment being exceeded—it is clear from the numbers that it has been exceeded comfortably—and you spoke about being in the top quartile when compared with English companies. Will you tell us more about where you are in relation to English companies and about the areas where you will need to make additional efforts to match the very top performers?
I ask Peter Farrer to respond, but we should remember that a body can slide backwards on the OPA. If, for example, a massive failure occurs at a big sewage treatment works, a body can find itself down the greasy pole fast. As a result, we have to work at keeping our place, but we plan to stay where we are and indeed catch up.
Mr Johnstone is right—this year, we achieved an OPA score of 368 against our delivery plan target of 338, which is a 9 per cent outperformance, and we made significant improvements in areas such as environmental pollution incidents. We got additional points for hitting our economic level of leakage target a year early. We also reduced the number of properties where burst pipes had interrupted the water supply and improved pressure to about 900 other properties. All those measures helped us to outperform this year’s target.
Ministers set 12 targets that you have to meet by 2015. You have mentioned some of them but, broadly, what progress are you making against the 12?
We are generally progressing well across the range of targets and we expect to fully meet the expectations that ministers have placed on us. We are also outperforming in other areas. Some of the objectives that we were set required us to carry out significant study work to ensure that we understood the issues well before we made any investment.
In his opening statement, Mr Mercer mentioned that the number of complaints is down by 35 per cent. The figure that I have extracted suggests that the number of written complaints is down by 34 per cent. Are we talking about the same figure?
I was talking about Business Stream.
The figures are just similar; we must not get confused.
Yes.
The number of written complaints is down by 34 per cent over the year. Are figures on written complaints difficult to compare? Has the number of complaints fallen across the board or are fewer people writing to you?
People write less and email more. I think that Peter Farrer can deal with what is meant by the term “written complaint”.
The decrease in complaints is a result of our focus in this regulatory period on putting customers at the heart of everything that we do. We have put a significant focus on improving customers’ experience of everything that happens in our business.
You are saying that written complaints include those coming in by electronic means.
Yes.
There are no disguised figures simply because people do not write as often as they used to.
No. There is a correlation between those figures and the number of telephone contacts, which is down by 24 per cent this year. That indicates that we are doing things right in the business because, if we prevent problems from happening, customers do not need to phone us.
You mentioned the number of complaints that you receive. How many of them were satisfactorily resolved?
We put in place a new service review team a couple of years ago and we have increased the skills in that team to ensure that we deal effectively with customer complaints. Our measure of whether complaints are dealt with effectively is whether they are escalated to the Scottish Public Services Ombudsman.
My final question was going to be the standard final one, about what Scottish Water is doing to further reduce complaints. However, against the backdrop that you have described, it must be difficult to reduce complaints further. What are you doing to try to achieve that difficult objective?
Our strategy for the customer experience and complaints is based on two main streams. The first is about being more proactive in how we operate and maintain our assets so that we prevent problems from impacting on customers in the first place. If we have no impact on customers, we do not get complaints.
As there are no more questions on that subject, we will move on to climate change and sustainable development.
In the past five years, Scottish Water’s operational carbon footprint has decreased by about 10 per cent, and carbon emissions are reducing. How do you intend to further reduce greenhouse gas emissions in the coming years?
It is worth giving a bit of context on the drivers of energy use, which is the principal driver of carbon emissions in our business. In the water system, we have the lowest carbon intensity of any water company in the UK. In part, that is down to the work that we have done on reducing leakage, but it is also because of our good fortune that those who preceded us laid a lot of gravity-fed water supply systems, which mean that we have less pumping to do than is required in England.
You talk about minimising the energy that is used in treating waste water. What is the impact of that on the customer? Does that provide better service?
The primary benefit of the upgrades that we have made in waste water treatment is a huge benefit in the quality of waste water discharges to the local environment, whether to local burns and rivers or—as in the case of Edinburgh—to the Firth of Forth. That benefits the whole marine environment, and it is a benefit to customers as users of rivers and beaches.
In your annual report, you say that your carbon footprint is being reduced despite investment to meet statutory quality enhancements. You have talked a bit about that. Is that a constant battle? Do you use a lot of energy to produce those enhancements? Are you balancing those high emissions against lower overall emissions?
There are three things to mention from a historical perspective. First, there is no doubt that upgrading the quality of our treatment—particularly our waste water treatment—inherently drives a big increase in our energy demand. However, when we are faced with a scheme to upgrade in a community, we endeavour to find the most sustainable way of delivering that scheme in all its various dimensions, which includes minimising the use of energy and therefore the scheme’s carbon emissions. We try to mitigate the upward pressure on energy demand.
I want to talk a bit more about leakage. You state in your report that you have
I will explain the context and then let Peter Farrer give you the specifics of how we are going to do that.
It is worth putting the matter into context. Mary Fee is right that we have reduced leakage, by another 54 megalitres per day in 2012-13. The figure of a billion litres that she mentioned is not correct—that was where we started the journey. The leaked water target is between 570 and 600, which is the economic level, and we have outperformed that.
You said that 600 is the correct figure for the economic level of leakage. Six hundred what?
Megalitres per day.
What is a megalitre?
A million litres.
That is fine. I just wanted to be absolutely sure about that. That is what I presumed it is.
Since we started on the leakage journey, we have reduced the amount of leakage by around 500 megalitres per day. To put that into context, that is the equivalent of the volume that is supplied to the whole of Glasgow and greater Glasgow on a daily basis. Back in 2006, that amount of water was leaking out of our pipes. We have now stopped that leakage throughout the country.
I imagine that you have a rolling programme of upgrades and maintenance, but it sounds as though the system is leaking like a sieve. Do you fix a leak and another leak appears, or are things not as simple as that?
They are not quite as simple as that. That sometimes happens, but it depends on a number of things. Pressure management is the key. If a system is under stress and a leak is fixed, that can increase the pressure because it blocks something that was naturally reducing it. Therefore, we have to carry out find-and-fix activities and pressure management at the same time. As we find more leaks, we can use the pressure-reducing valves to reduce the pressure in the network to get a calm network. It is complex. We have more than 200 leakage zones, and every zone has different anomalies—there are different things that we would look at for each zone.
As well as leaks, there are weeps and seeps. Weeping and seeping at joints are not things that we can necessarily see. You might imagine that we would be floating away, if you say it quickly. It is a good question, and it is difficult to explain, which is why my colleagues are explaining it, not me.
I know that this does not happen often in Scotland, but we are occasionally told not to water our gardens or wash our cars, and to be careful with the amount of water that we as customers use. What impact does the amount of water that we use and the amount of water that leaks from your system have on the price that we pay?
In the short term, it is quite a limited impact. The principal reason is that, if we drove down leakage significantly below the economic level of leakage that we are now at, paradoxically, that would start to increase costs rather than reduce them. We would be spending more on finding and fixing the leaks than the value of the water saved.
I accept that. I am sure that you must also accept that, given the amount of leakage every day, it is a bit galling to customers to think that our bills are X, and we are doing what we can, yet you are leaking all that water from your system on a daily basis.
We are trying to take a customer-centric approach. Leakage was one of the areas that we explored in depth with customers as part of our customer research activities for the 2015 to 2021 period. Typically, we got a group of customers together in a room for sessions that were independently facilitated and exposed them to all the different dimensions around leakage, just as we have done in the past few minutes.
So ignorance is bliss—if we do not know about it, it is all right.
Absolutely not. We have teams of people who are working all the time to find and fix leaks and to ensure that we are operating the system as economically as we can in the interests of customers.
I promise that my question will be much gentler than the previous round of questions. Parts of the Water Resources (Scotland) Act 2013 are now in force. I am interested to explore what steps you are taking through your various businesses and working in co-operation with your partners to implement that act and to achieve the Scottish Government’s hydro nation agenda.
The hydro nation agenda goes much broader than Scottish Water. We must play a key part in it, but it is important to remember that it is an agenda for the whole of Scotland.
I have a specific question on that. You referred earlier to displacing energy from the grid. Is that work at an early stage? Can you give us numbers for what that represents in terms of energy generation and income saved to the business?
There are a few dimensions to that. There is energy that we generate on site that can displace bought-in energy and there is renewable energy that we might generate in our asset base but which we do not need to consume at that point, so it gets exported to the grid. If we combine those two elements, they amount to about 22 gigawatt hours of renewable energy that is currently being generated. Our expectation is that over the next two to three years that will broadly double. By the end of the 2015 to 2021 period, depending on where we get to in agreeing our business plan, we hope to increase our overall self-generation capacity to about 75 gigawatt hours, which will be about 15 to 17 per cent of the energy that we need to consume.
That is a helpful clarification. What time period do you envisage for that shift?
We hope to be up to 75 gigawatt hours by 2021.
Thank you. Sorry, I did not mean to interrupt you, but it was useful to clarify that point.
No, that is fine. In terms of the total quantum of energy generated, the biggest step change is what can be done from wind. For example, we have a scheme in which land was made available for wind generation, which is already generating 350 gigawatt hours. I hope that, by the time that we are here again next year, other such schemes will have obtained approval. However, I am sure that the committee will understand that that can be quite a long and complex process in which success cannot be guaranteed.
On implementing the 2013 act and the wider agenda, do you have anything further to share with the committee?
The other main area to highlight is our consideration of what we can do to give further support to sustainable rural communities. We talked earlier about the high energy intensity of some of our activities, particularly the waste water side. There can be a lot of cost and energy associated with supporting a local community. We are doing quite a bit of research work in partnership with others to see what we can do to support sustainable rural communities and whether there are ways of having more local generation of energy and local supply of water and waste water that is consistent with the hydro nation agenda.
Finally, as we have you here, I think that the interested public would find it remiss of us if we did not mention the publicity that you attracted earlier this week in terms of oil and water. We know that they do not mix—sorry about the pun—but what is your take on the situation with the pipe from the Kirriemuir sewage works to the River Dean and the BP Forties pipeline?
The scheme is being developed to upgrade the quality of waste water treatment and discharge in the Kirriemuir area. One dimension of the scheme, which we have experienced on many previous occasions, is that the path of the sewer needs to cross major national infrastructure such as oil and gas pipelines. In that situation, we need to agree with the relevant energy companies the method by which we will cross those pipelines and the way in which they will supervise the crossing. That is all wrapped up in a pipeline crossing agreement, and we are basically there. All the method statements have been agreed, and the work when it happens will be supervised by engineers from the energy companies. The pipeline crossing agreement is effectively ready for signing.
Will there be any loss of assets or money because of the delay in the scheme?
Absolutely not. All the preliminary work that is necessary for the scheme to progress has been done. We now need to get the bit in place where the sewer crosses the oil and gas pipelines.
Has that involved lawyers fighting it out?
We have not had any lawyers fighting it out. We have been dealing purely with the major energy companies, as you would expect us to do, to ensure that we protect our interests while they seek to protect theirs. The crucial element is to agree the technical details and technical method statements with regard to how the pipelines will be crossed in a way that safeguards that important national infrastructure.
It is true to say that we have been doing this for years. I could not give you a number, but we have dealt with hundreds and hundreds of similar situations. Sometimes, events change attitudes a wee bit, and the BP Gulf of Mexico incident has perhaps made us take a harder look now—that is real life. We have to take that into account, which we have done, and we are now proceeding.
Are you saying that the time that has been taken is normal?
No, I would say that the time taken on the scheme has been a wee bit longer because there was a bit more difficulty in getting agreement due to events elsewhere. That is now done, and we are proceeding.
Thank you. As there are no more questions on the annual report, we will take a short pause before we move on to questions on the strategic review of charges.
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