Official Report 370KB pdf
Good morning, everyone, and welcome to the Infrastructure and Capital Investment Committee’s 18th meeting in 2012. I remind everybody to turn off their mobile phones and BlackBerrys, because they affect the broadcasting system.
The committee has heard many calls for the definition of the value of Scotland’s water resource to include not just economic value but environmental and social aspects. What is Scottish Water’s view on that discussion that we have been having?
Scottish Water welcomes the proposals that are laid out before the Scottish Parliament in the bill, which provide a strong statutory basis for developing Scotland’s water resources in the interests of Scotland. Our belief is that there are economic, societal and environmental benefits, so we see the value as covering all the pillars of sustainability.
Would it be helpful to spell that out in the bill, rather than having what has been taken to be a narrow definition of the value?
That might provide useful clarification. We have certainly always interpreted the value in the wider sense.
Several witnesses have called for ministerial directions to designated bodies to be subject to consultation with other designated bodies and, possibly, the wider public prior to coming into force. What is Scottish Water’s view on that suggestion? Would it bring any benefits?
As one of the designated bodies, we do not have strong views on that. We are fairly clear that we are designated in the bill. It might be appropriate to consult other bodies more widely should they become designated, and to have wider discussion, but we do not have strong views on that.
I ask Mr Wallace, as director of communications, whether it would be useful to consult the wider public on such issues.
Our philosophy is to be as open and transparent as possible. We are answerable to the Parliament. Any channel that broadens the possibility of engagement with our public and stakeholders has to be welcomed.
We will take that as a yes.
It is fair to say that the bill is a little ambiguous in that respect. We have interpreted it as providing for a duty to report every three years. That seems reasonable. Reporting over a longer period would not be effective, and a shorter period might be too short for there to be anything of substance on which to report. It might be useful if the bill clarified whether the requirement is to report every three years or just once.
What should be included in reports?
We have not thought that through, but I guess that it would be helpful for the public to understand what the Government has done, what activities have taken place during the three years and what benefits activity is bringing to the economy and the environment. We envisage an overarching report on what has been done and how much progress has been made.
Part 2 of the bill is on control of water abstraction.
We heard from a number of witnesses that part 2 came as something of a surprise and that there was limited or no consultation on its provisions prior to the introduction of the bill. Was Scottish Water consulted on the proposed new abstraction rules?
I think that we were aware that there would be abstraction rules. We are a major abstractor, and I think that we were consulted.
You are here now. What is your view of the proposals?
It is quite reasonable for abstractions at the level that is envisaged—which are perhaps exceptional; there are not a load of abstractions at that level in the country—to come to the attention of the Scottish ministers. We are quite comfortable with that.
Do you have a view on the logic behind the 10 megalitre limit?
No. I cannot comment on that, I am afraid.
What about the exemptions in the bill?
The exemptions are proper. There is a question as to whether they are sufficiently comprehensive. One or two sectors might well have been missed out and it would be worth clarifying whether that is the case. Scottish Water is an exempted organisation, because we abstract for the purposes of providing drinking water to protect public health.
Abstraction will be exempt
It is clear to us that if we wanted to abstract on the non-core side of our business, we would have to come through the Scottish ministers. Indeed, we would have to come through the controlled activities regulations with the Scottish Environment Protection Agency. The exemption does not cover non-core activities.
You would be treated in the same way as anyone else would be treated if you wanted to abstract on that basis.
Yes.
Scottish Water said in written evidence that it supports the proposals in part 3. Some witnesses expressed concern that Scottish Water Horizons might have an advantage over its commercial rivals in the fields of waste management and renewable energy. Did you have a role in the development of the proposals in part 3?
We were consulted on aspects of the bill relating to the separation of core and non-core activities. Our view is that the bill offers a helpful clarification that our core business is to provide water and waste water services for customers in Scotland. It is helpful to understand that the charges that those customers pay are only for water and waste water services. The bill helpfully clarifies that non-core activities will not be financed by customers and must be financed by other means. I am sure that the Water Industry Commission for Scotland will be happy to elaborate on that.
I understand that, through Scottish Water Horizons, you are already investing in renewable energy generation and undertaking waste management activities. How will this part of the bill benefit Scottish Water in how it carries out its existing activities?
What is helpful is that the bill places a proactive duty on us to fully utilise, where we can, assets on the non-core side of the business for the benefit of Scotland. That might seem like a very slight and subtle movement, but the bill makes that a proactive duty instead of something that falls naturally out of our core business.
Is that the only route to achieving that, or could other options, such as formal directions from Scottish ministers to Scottish Water in its role as a designated body, be considered?
The bill sets out a statement of ambition and expectation about how ministers want us to develop and grow our business. As you rightly point out, we are already involved in these commercial activities, but the bill provides, if you like, a formal green light and will make it much more publicly known and transparent that we are expected to move in this direction.
Do you share the concerns expressed by the centre for water law that the wording of the section defining core functions means that certain hydro nation-related activities such as the generating of electricity by Scottish Water Horizons for use by Scottish Water could fall within the definition of a core function?
No. As a regulated business, we are absolutely transparent. Scottish Water Horizons makes commercial decisions. I see no conflict in that respect; everything is audited and open to scrutiny.
I want to return to the suggestion that the convener has mentioned and which you have partly addressed, which is that Scottish Water Horizons enjoys an unfair competitive advantage because it can access not only loans at favourable rates but Scottish Water’s substantial facilities and land banks. You have said that you keep the different parts of your business separate and that you are happy for the issue to be subject to maximum scrutiny and transparency, but it is only fair to give you the opportunity to put on record at the committee your fullest possible response to the suggestion that you have an unfair advantage. I would certainly welcome your views on the matter.
I think that we would need more specific instances of what you are referring to.
As the convener has pointed out, the Scottish Environmental Services Association and SSE have suggested that you enjoy an unfair competitive advantage with regard to your waste management and renewable energy activities. Could you address that point?
I can understand how that might be the perception of those organisations, but the reality is that the non-core business is financed at commercial rates and not at any Scottish Government-subsidised rate. We and indeed the Government have to be very careful of European Union state aid rules. For the record, Scottish Water Horizons does not enjoy any beneficial financing rate from the Scottish Government; everything is carried out on a proper commercial basis.
You are very clear that there is no breach or potential breach of EU state aid rules in this regard.
Indeed, and I also point out that we are routinely subject to scrutiny by WICS through the reviews that it undertakes as part of its auditing of transfer pricing. There is protection both for customers and for the Government in ensuring that we have no cross-subsidies between our core and non-core activities or with regard to financing from outside Scottish Water.
So you are not expecting a legal challenge any time soon.
No.
Part 4 relates to raw water quality.
I have three questions. First, how will the bill’s provisions allowing Scottish Water to enter into agreements with land managers assist in improving raw water quality? Is there anything to prevent Scottish Water from entering into such agreements at present?
The bill proposes powers for Scottish Water to enter land, if needed, to protect raw water. We do not have those powers at the moment.
Is that not part of SEPA’s role?
As a monitoring and enforcement agency, SEPA walks a number of what it regards as priority catchments for the environment. The proposed powers are very complementary, but I note that our focus is different and relates to the protection of raw water for consumption and public health reasons.
Evidence has highlighted the importance of a catchment-wide approach to managing Scotland’s water resources and suggested that Scottish Water must work in partnership with land managers, local river basin management teams, and other bodies such as the Royal Society for the Protection of Birds to ensure that the quality of raw water is managed properly. To what extent do you work in partnership at local level? Could the bill do more to emphasise that type of catchment-wide approach?
We are currently working in partnership with SEPA and NFU Scotland, we are involved with the voluntary initiative in the River Ugie and we are about to start conversations with the RSPB. Certainly, our approach is highly collaborative with stakeholders in the environment. We have also been working with SEPA on shared training initiatives in which Scottish Water staff are being trained by SEPA, so that we can dovetail our activities and work collaboratively. The bill proposals are quite extensive in that regard and they are sufficient; my personal view is that they could not be reinforced further.
The centre for water law is concerned that Scottish Water may end up entering into agreements that support land managers simply to meet their legal requirements. Can you give any assurances that that will not occur?
Absolutely. We are very clear that, first and foremost, farmers’ activities must comply with the general binding rules that have been set out in Scotland, which SEPA enforces. That is the baseline, but we enter into activities and agreements with farmers beyond that. Such activities and agreements include the provision of biobeds, which are biological beds that take away pesticide run-off when farmers fill up sprayers, and working with farmers to encourage them to fill up pesticide sprayers far from watercourses. We provide advice and finance to help farmers to put in place biobeds and extend buffer strips. We also help farmers to switch pesticides, in circumstances where it is beneficial for them to cease using chemicals such as metaldehyde and switch to some other pesticide. Those activities are beyond the general binding rules, and we are very clear about that.
There are no questions about part 5, so Gordon MacDonald will ask about part 6.
I want to ask about the sewer networks. I understand that Scottish Water supports most of the proposals in part 6. In its written evidence, Scottish Water indicated that those proposals will support the development of a catchment management approach to the urban drainage network. What does an urban catchment management approach involve and how do the proposals in the bill assist in its development?
That goes back to the earlier conversation on powers of entry. We currently have catchment liaison officers out in the environment who walk rivers that are of particular interest to us because we are aware of pollutants coming into the sewer system, which is essentially an open system. With the powers that are proposed in the bill, we could have liaison officers or catchment inspectors who would be able to enter premises if we found significant inputs of something in the sewer system that should not be there. We would then work in collaboration with SEPA and its enforcement powers to make sure that that activity ceased.
Would private owners be expected to bear the cost of any improvement work?
In all likelihood, yes. It is very difficult to say in the absence of specifics, but it is probable that they would be infringing a particular aspect of their licence. The proposals in the bill would give us the power to undertake active monitoring to check that.
We have heard evidence that Scottish Water should investigate innovative ways of connecting properties that are served by septic tanks to the sewer network. Does Scottish Water have any long-term plans to connect such properties to the public network?
As a general comment, no. Septic tanks are a highly sustainable and efficient way of treating waste water in a rural environment. It would not be cost effective for the generality of customers for us to start on a programme of connecting every septic tank to the sewerage network. There may be circumstances in which environmental issues arise and it becomes important that some other solution is found. Connection to the public network is absolutely a last resort. We work with householders, when appropriate, to help them to empty and maintain septic tanks routinely, and we give them advice. If a septic tank were having a huge environmental impact in a community setting, we would look, along with SEPA, at some other solution on which we could work with the community.
You said that septic tanks work well, but we have had evidence that only around 60 per cent, or two thirds, of all septic tanks are registered. The bill includes proposals whereby a proprietor could take responsibility for maintaining and emptying a shared septic tank without the consent of other owners. Given that we do not know about the ownership of a third of septic tanks, and that some owners may not be willing to take responsibility for maintaining their tanks, should Scottish Water have a role to play in taking over ownership or maintenance of those tanks in the interests of public health?
In response to your first question, we have certainly had discussions with SEPA about shared communication campaigns on septic tanks and the on-going need for emptying and maintenance. We would be happy to engage in such campaigns.
Malcolm Chisholm has some questions on water shortage orders.
In your submission, you indicate that water shortage orders are likely to be used only infrequently, with voluntary arrangements between Scottish Water, SEPA and land managers being the usual method for dealing with shortages. How do such voluntary arrangements currently operate? Have there have been any recent water shortage incidents during which the powers in the bill would have proved useful?
It is fair to say that in Scotland, unlike in the south-east of England, large-scale water shortages have not happened for some time. However, we experience short-term, smaller-scale water shortages. We had shortages in Dumfries and Galloway in 2010, following periods of oddly dry weather. The fact that our storage facilities in that area are not large led to shortages. We worked collaboratively with all the stakeholders to ensure that a supply was maintained to customers during that period.
That was helpful.
I think that that would depend on the area that the water shortage was in and the types of non-domestic user that were in that area.
As we have no further questions for the witnesses, I thank them very much for their evidence.
We continue with our evidence-taking session on the Water Resources (Scotland) Bill by hearing evidence from the Water Industry Commission for Scotland, commonly known as WICS. I welcome the witnesses from WICS—Alan Sutherland, the chief executive, and John Simpson, the director of analysis—and thank them for their written evidence.
What impact, if any, will the implementation of the proposals in the bill have on the price review for the period after 2015?
The impact will be marginal, I think. To be clear, we are the economic regulator for the core functions of Scottish Water. We have no involvement in any of its non-core activities, with the exception of its retail activity, in relation to which we have general responsibility for the licensing framework that allows Scottish Water Business Stream to compete alongside other retailers for non-household customers.
Will the proposals in the bill have any impact on price or customer service for Scottish Water’s customers?
The prices paid by Scottish Water’s core customers—households and the retailers that pay wholesale charges to Scottish Water—will be at the lowest level that is consistent with the delivery of the objectives that the Scottish Government sets out. In essence, our job is to take the Government’s objectives for the industry and its principles for charging and calculate the lowest reasonable overall cost of delivering them. We will keep that number as low as we can reasonably keep it, consistent with a sustainable industry, which we all want.
There is nothing intrinsic to the bill that would create upward pressure on prices, for example.
No. Some of the things that you have discussed around catchment management and the like would push the other way and help us to keep bills down. The better regulation of fats and greases in the sewer system would clearly help to keep costs down. Such measures ought to help but, in the great scheme of things, they are relatively marginal to the overall impact on the end customer.
In terms of customer relations and customer service, you have heard some arguments about the need for wider public consultation on certain issues. Are you satisfied with Scottish Water’s claims to be open and transparent? Is it consulting the public to a good standard, or could that be improved?
It is always possible to improve communication and interaction with customers and stakeholders generally. However, within the core activities that we observe, Scottish Water is very active in communicating both at a local level and more generally about where it is going as a business.
In your opinion, is the way in which the bill separates Scottish Water’s core and non-core functions robust enough to ensure that we do not end up with customers paying extra to finance non-core activities?
It is our job to ensure that they do not.
Is the bill strong enough in its definition to avoid that?
Yes, I think that the bill is strong enough—absolutely.
Each year, we collect detailed accounting information that contains Scottish Water’s allocations of costs between the core business and the non-core business so that we know what is going on. In addition, each year, we get a list of the transactions that have taken place between the core and non-core parts of Scottish Water, so that we know what is going on there, too. From time to time, we also carry out a detailed review, looking behind that information at the detailed paper trail within Scottish Water. We are very aware of the importance of ring fencing the core business from the non-core business, and it is a matter of our being on the ball, year on year, in ensuring that things are as they should be. We think that we have the necessary powers and procedures to do that.
The bill places a duty on Scottish Water to pursue a number of non-core functions. Are you satisfied that that change will not impact on Scottish Water’s pursuit of its core functions? Might we be diluting—a dangerous word, which I was trying to avoid—Scottish Water’s pursuit of its core functions?
Certainly we will have no regard to that in the efficiency challenge that we set before Scottish Water. Scottish Water will have the same regulatory settlement that it would have had irrespective of what it does in non-core areas of activity. It is for Scottish Water to find a way of justifying that. If Scottish Water needs extra resources in the non-core area in order to pursue those activities, that will be a commercial decision for Scottish Water and, frankly, that is not something that we will take much interest in. We are focused on ensuring that the core business performs in absolutely the very best way that it can to the benefit of customers in Scotland. In Scotland, we have the lowest average household charges and, going forward, we see no particular reason for increases beyond the rate of inflation.
If Scottish Water fails to get on with its core business, such as making sure that its pipes do not leak, you will be the first to point it out.
We will indeed. You can rest assured of that.
Given that Scottish Water is already investing in renewable energy generation and waste management activity, is part 3 of the bill necessary? Will it benefit Scottish Water in carrying out such activities?
I suppose that it is worth making a clear distinction here. Scottish ministers place on Scottish Water certain obligations within the core business, such as using certain proportions of green energy. Those are strategic decisions that have been made by Government and, as such, we ensure that those activities are funded at the lowest reasonable overall cost along with everything else. Where Scottish Water goes beyond that, it becomes a non-core activity. Some renewables activities are core because they are part of the defined objectives that have been set out by the Scottish Government; other renewables activities are not part of what has been defined by the Scottish Government but are at Scottish Water’s discretion. I guess that the bill is trying to provide much greater clarity around those activities by drawing a very clear distinction between them and what is required by ministerial objective.
In practice, is there not a clear distinction at present?
On the margin, it can always be questionable how much comes from one source versus another. Things such as wind energy are very variable in the amounts that they put into the grid, so you will get slightly different answers depending on the time period that you look at. I think that it is just worth having the clarity there.
Will it help your work to have that clarity?
I suspect that it is one of those additional things that John Simpson mentioned. We get lists of transactions and this is another thing that we can add to that list to ensure that we get greater clarity.
On the margins, it can only help. As and when the activity increases in size, it becomes more material and more important that we have clarity at the boundaries.
I want to look a bit more closely at Scottish Water’s subsidiaries. We have heard concerns from others that Scottish Water Horizons may be operating at an advantage in comparison with commercial rivals in the fields of waste management and renewable energy due to its access to loans at favourable rates and access to substantial existing facilities such as land banks. How do you respond to such concerns?
All businesses have modestly different costs of capital, depending on ownership structure, levels of debt and the quality of management. Simply comparing the cost of capital of one business with that of another does not necessarily show that a business has an advantage, or if that does show an advantage, it does not necessarily show why there is an advantage. The arrangements for the expected returns of Scottish Water Horizons or for the costs of debt that it is charged are purely matters for the Scottish Government. You have heard this morning about state aid rules that must be abided by.
We have heard evidence from others that the Scottish Government’s support of Scottish Water Horizons might breach EU state aid rules. Do you have a view on those claims?
We have taken counsel’s opinion on state aid for other purposes. Based on that opinion, I think it unlikely that the Government is breaching the rules. In essence, under those rules, there must be a material advantage that impacts on interstate trade in a material way. It is unclear that any of the specific projects in which Scottish Water would be involved are big or substantial enough to be caught by that. That does not mean that the Government does not want to be careful on the issue. It certainly does not want to be cavalier and it wants to ensure that the financing is not overtly generous.
The bill allows the Scottish ministers to make loans and grants directly to subsidiaries of Scottish Water as part of the total annual Scottish Government finance that is provided to Scottish Water. What is your view on that proposal? Could such additional funding deplete the available resources for Scottish Water’s core water and sewerage functions?
It certainly would not be desirable if it impacted in any way on the levels of borrowing that were made available to Scottish Water for its core functions. We consider the borrowing carefully in relation to Scottish Water’s on-going financial sustainability. We want to ensure that we do not delay expenditure that will ultimately put up bills just to keep bills a bit lower than they otherwise would be today. We want to create a financial regime for Scottish Water in which we can look ahead confidently, as we can now, and we see no particular reason why bills need to go up in the foreseeable future, which includes beyond 2015, when the next regulatory period kicks in.
I am sure that they would.
The committee has also heard calls for Scottish Water to promote water efficiency among its customers with a view to reducing costs. What are your views on that?
Scottish Water is already required to give advice to customers on water efficiency. On the non-household side, Business Stream has set up a whole new business activity—it is irritating because I want to call it a business stream—that provides advice to non-household customers to save them money. However, the truth of the matter is that saving water does not reduce costs very much, at least not in the short run. Until the next asset replacement cycle, when the size of the assets can be reduced, customers are just reducing the amount of water that they consume. That literally saves them the cost of the energy to pump the water and the cost of the chemicals that go into it, which would be about 2 or 3 per cent of costs. Is that right, John?
It is about 3 or 4 per cent.
It is just not that big a deal. Yes, it is desirable—anything that allows us to reduce abstraction and leave the environment in a better state is a good thing—but it is not a big deal from the standpoint of reducing costs to customers.
Consumer Focus Scotland expressed concerns about the operation of the deemed contract system in the energy supply industry. It said in its evidence:
It is not entirely clear what Consumer Focus Scotland is saying in that regard. Deemed contracts are about introducing clarity as to the responsibility of each particular customer behind a particular meter. The likelihood is that we will keep it as simple as we possibly can, so if there are six customers behind a meter, they are each going to be liable for one sixth of the total bill—it is not going to be any more complicated than that.
Good morning, gentlemen. Your written evidence raises the issue of non-domestic customers who are connected to shared supplies but do not contribute to the operation and maintenance of the public water and sewerage network. I am keen to understand the scale of that problem. Will you please enlighten us on how big the problem is? Can you quantify the number of non-domestic customers who benefit from the network but do not contribute to it? Do we know what the loss of income is and what it means for suppliers?
At one level, the figure is very small. Business Stream’s entire bad debt charge—this relates to non-payers and people whom we know are liable but who are not paying—was about 0.7 per cent the last time that I looked. That has come down considerably since Business Stream was set up.
Will you put a figure on that?
The figure is 0.7 per cent.
What does that mean in terms of income?
Sorry—that is 0.7 per cent of about £300 million, which is £2.1 million.
Not insignificant sums are involved, although the percentage of the overall business is small.
That is the entire bad debt charge, which does not relate just to the issue that you raise.
I am trying to quantify the extent of the problem. We will discuss your suggested solution, so I want to understand the problem.
The issue forms a small part of the £2.1 million of debt.
After the meeting, could you provide the committee with the information that I am asking for, so that we can better understand the issue?
We can certainly provide the information that we have—that is not a problem. However, a problem is that we do not necessarily know the position. I will try to explain that.
We are looking for clarity and I am grateful for your explanation. It is clear that the situation is not straightforward; otherwise, you would have more information to provide to the committee.
We know that the issue causes frictions, which are identified by retailers that are competing for customers. Before there was a contestable market on the non-household side, Scottish Water worried about whether the right amount of revenue was coming in from its non-household customers to cover the costs that it allocated to those customers. It did not worry about whether properties A, B and C were paying exactly the right amounts. In a contestable world, that changes. If someone wants to switch a customer but finds that that customer has not been paying, it is clear that that customer is exempt from the market.
Just to be clear, the amount involved would be a very small percentage of the £2.1 million that you mentioned.
Yes.
Really, the principle is that all non-domestic customers should contribute towards the network rather than possibly help to bankrupt the company.
Yes, absolutely.
Environmental groups have suggested that WICS be added as a designated body. What is your view on that?
My personal view of the way in which we do our job is that we take strictly the objectives and principles of charging that we are given by Government and then calculate the lowest reasonable overall cost from those. We have no remit to say, “This does not seem to be value for money, so why are we doing it?” In many cases, these are essentially political or national state obligations, and it is not really for us, as the bean counters of how much money Scottish Water should be given, to have a view on such things. That is what the Government does and that is what the Government is accountable to the Parliament for. I do not think that, as a matter of practice, involving us in conversations about environmental value for money would be a particularly useful step forward.
There are no more questions, so thank you very much, gentlemen, for your evidence today. I briefly suspend the meeting to allow the witnesses to leave the room.
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