Environment and Rural Development Committee, 05 Oct 2004

Meeting date: Tuesday, October 5, 2004

Official Report 289KB pdf

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Water Services etc (Scotland) Bill: Stage 1

We come back fresh to item 5, which is our fifth day of evidence on the Water Services etc (Scotland) Bill. Witnesses have raised a range of issues with us over the past month, of which we have a running checklist that we wish to raise with the minister. This morning is our last evidence session, so we will see how far through our checklist we get.

I welcome the minister and pretty much the same team from the Executive. Minister, do you have any brief remarks? I draw to my colleagues' attention the fact that we have a letter from the minister on the water customer consultation panels, which everyone should have received yesterday. That is the only extra information that members need for the discussion.

The phrase "pretty much the same" rather understates Clare Morley's appearance at the committee. She is in charge of the bill team. She was sitting behind us, although she is now at the table.

I want to put the Executive's position on record. The bill is about strengthening Scotland's water industry. We believe that it takes prudent, precautionary steps to ensure that competition will not disrupt the supply and distribution of water, and to protect vulnerable customers from the potential impact of retail competition in this essential service. We believe that the bill strengthens the regulation of the industry, ensuring that it serves the customers' interest in a robust, transparent and accountable way.

The bill achieves those objectives in several ways. It clearly prohibits common carriage and retail competition for domestic customers. Without those prohibitions, accountability for public health would be undermined and support for vulnerable households could not necessarily be continued. The bill reforms the charge determination process. It defines with new clarity ministerial responsibilities for policies that shape the water industry, and it strictly defines the economic regulator's role, which is to price the ministerial investment and charging policies that Scottish Water must deliver. I have indicated that we will balance the water industry commission's charge determination powers with a right for Scottish Water to appeal to the Competition Commission. That possibility will provide the rigour that the system requires. There will be independent expert investigation of determinations.

This committee recommended the creation of the water industry commission. I believe that that will greatly improve economic regulation. Being led by a body corporate will offer a more accountable and transparent decision-making process. It is essential that the commission can understand and measure ministerial policy objectives and Scottish Water's functions. It will not be the commission's job to interpret or judge between the two. The bill makes a clear distinction between setting policy and objectives for the industry—which are for ministers and the Parliament—and the commission's duty to calculate the resources that those require.

I know that the committee has heard much evidence on the requirement for due regard to be paid to sustainable development—a point that Mark Ruskell raised earlier. I can only repeat that this bill in no way overrides the requirements of the Water Industry (Scotland) Act 2002—it is subsidiary to that act. The act requires Scottish Water to

"act in the way best calculated to contribute to the achievement of sustainable development."

As the convener said, I wrote to the committee yesterday to outline changes to the functions of the water customer consultation panels that I am minded to propose at stage 2. I apologise that those changes were not incorporated in the bill as introduced. However, it has been necessary to reflect on the implications of the bill for the customer panels, and also to listen to stakeholders' views. I believe that my proposals will offer a coherent strengthening of the customer voice. They will ensure that the panels have a specific input to the ministers who are setting objectives for the industry, and that the panels—representing households and businesses as users of public water and sewerage, and taking on complaints handling and a stronger reporting function—will offer a right of reply. Panels will be able to speak directly to and for customers.

I should have said that the committee also has a report from the minister on equal opportunities and the bill, and one from the Finance Committee on the financial memorandum. That information will help us in the preparation of our own report.

Thank you for your statement, minister. You will be aware that the water services regulation authority, which will replace the Office of Water Services in England and Wales, is under an obligation to carry out its duties in the manner which it considers is best calculated

"to contribute to the achievement of sustainable development."

That is a quote from the Water Act 2003.

We have heard a lot of evidence on the water industry commission's role and powers, and it was said many times that the commission should have a statutory responsibility for sustainable development that is similar to that of its equivalent in England and Wales. Why did you decide not to give the commission that responsibility?

That was done because I believe that any operation of the water industry is regulated by the Water Industry (Scotland) Act 2002, and that any policy decision that is taken by ministers and guided by the Parliament on how Scottish Water should operate must be taken within that framework. Delivering sustainability is a policy matter and is not necessarily for a regulator, who should monitor the performance—and particularly the economic performance—of the industry. It is not the function of the commissioner—or the water industry commission, as it will be—to deliver on wider policy objectives. Rather, the commission has a clear role to play in the delivery of economic performance and investment, as set out in the particulars. Policy objectives are a matter for ministers and in setting them ministers must have regard to obligations under the act. There is a distinction. Giving people a job that they are not necessarily qualified to do will not improve matters—indeed, doing so might confuse matters, as it would then be suggested that there are policy objectives that ought properly to be for the commission. I do not believe that that should happen.

I understand what you are saying. It is appropriate that you, as the Minister for Environment and Rural Development, should set the policy direction for the economy regarding water services, the environment and social justice. Those are the three elements of sustainable development that you must put in place in setting a direction. The problem is that the proposed water industry commission will not work to that policy framework. It will work to a policy framework that is about lowering costs to consumers. Therefore, there is a mismatch.

We all understand that there is a water industry commissioner because Scottish Water is a monopoly body. Therefore, it is not open to consumers to bring pressure to bear on that body to gain the advantages that they might in an open market. There are good policy reasons for that being the case. It is for the water industry commissioner—among other things—to set objectives within the policy framework to ensure the delivery of a service to a prescribed quality, to deliver quality in other policy objectives and to ensure that, in delivering its investment programme, the body works within efficiency parameters that make it comparable with other operators. Historically, the water industry commissioner has used the operation of similar sized companies in England and Wales as a benchmark.

So you are saying that the water industry commission will work within a sustainable development framework because that framework is set by you.

I am saying that if objectives that are handed to Scottish Water are set by ministers and Scottish Water must then develop its plans and programmes on how it will deliver those objectives, Scottish Water—as you pointed out, and as we discussed earlier this morning—will be under an obligation to deliver those objectives with due regard to sustainable development. No matter what pressure the commissioner brings to bear on Scottish Water to perform in an effective and efficient way, that will not relieve Scottish Water of its obligation to meet the requirements of section 51 of the Water Industry (Scotland) Act 2002.

But to use your own words, minister, the pressure that is coming to bear is coming from a different policy framework. It is coming not from a sustainable development context, but from one of lowering the economic price and working within a competitive framework. Surely it is better to place the duty to promote sustainable development on the water industry commissioner, so that he can bring pressure to bear on Scottish Water, while being mindful of the sustainable development policy framework that you are pushing. Scottish Water must work to it and the regulator should be mindful of it as well. Surely we need to join up the three areas.

But they are joined up. Maybe we are just not going to agree on this. In assessing the financial requirements of Scottish Water, the water industry commissioner cannot disregard the fact that Scottish Water has a clearly stated objective, as set out in section 51 of the Water Industry (Scotland) Act 2002.

In setting the financial framework for efficiency and effectiveness and, more particularly, comparability—because there is no ability to buy out—the commissioner cannot suddenly say, "I want you to be more efficient and more effective and, by the way, I see you've listed all these issues. Why are you dealing with them?" "They are sustainable development objectives, and they are set out in your requirements." "I'm not funding them." The commissioner cannot do that. He is required to produce financial parameters that bear down on Scottish Water in terms of reasonable efficiencies in comparison to other operators. He is also required to allow Scottish Water to operate a budget that enables it to deliver the objectives that are set by ministers and fulfil the functions that are specified in the overarching act. You cannot allow the commissioner to decide on his own which policy objectives he will feed into the process. He is setting economic parameters for Scottish Water.

The first of your complaints may be that you are not yet satisfied that Scottish Water is delivering fully on its obligations under section 51. I am not going to debate that with you this morning. However, it is under section 51 that sustainable development obligations ought to be raised and addressed within Scottish Water's programme. It is not the function of the water industry commission to impose them.

We have probably taken that subject as far as we can. The policy framework that is being adopted by Scottish Water, your department and the commission is not coherent. I cannot see why it has been adopted. There is a coherent framework for England and Wales in the Water Act 2003, but not here. I do not see why there is an objection to putting sustainable development in the bill, given that you are saying that the commission will work in due course—

It may be that with a privately owned water body you need someone else to impose public policy. We actually have a means of imposing public policy. We have a commissioner operating a publicly owned body, but I would not want there to be confusion between policy objectives and regulatory functions.

The question arose from evidence that we received that in England and Wales the regulatory body has that function, whereas our body will not. We can go back to the Official Report, read the evidence and reflect on it.

Indeed. We are not comparing apples with apples. We are talking about a body, the policy objectives of which are set by ministers and the Parliament. I am not sure that the situation is comparable with that in England, where the water industry is privatised. I have no intention of going down that road.

We are talking about the regulatory function.

You may desire to impose a regulatory function because you cannot have it at parliamentary level, but that does not suggest that you need to do it. We have opportunities to set objectives at ministerial level, and to ensure that Scottish Water has a requirement to meet them. I humbly suggest that in such circumstances there is no advantage in confusing a policy objective with the role of the regulator.

We will think about that. It was described to us as a bean-counting process. We will want to take a view on whether we think that that should have a wider objective.

If you do, you will have to look at wider policy objectives. I do not see why you would narrow the field. That is why I have an objection—

I do not think that we see it as a narrowing of the field: we see it as ensuring that all the objectives that have been set are properly addressed. We are talking not about focusing down on one issue, but about the kind of trade-offs that we have talked about before in terms of sustainable development.

It is for you to decide, convener, as long as you look not only at the role of the commission, but at the role of Parliament, which has no bearing on the water industry in England and Wales. I think that we have a different structure in Scotland.

We will think about that.

We got your wee letter this morning, minister. I am interested in where this has come from and where the evidence is. I am particularly interested in where we will take evidence on these changes. I do not know whether we have taken evidence on the kind of changes that you are suggesting. I am concerned that, if the proposals in your letter are carried through, we will give considerable powers to an unelected, unaccountable body. Why have you made that decision?

In representations to us from time to time, we have received requests on two grounds. We have heard, first, that the water consultation panels are slightly ineffective and that, secondly, given the fact that the customer base is both domestic and non-domestic, it does not make sense for us to draw an unnatural distinction between the two. We have been asked why domestic and non-domestic customers should not both have access to those panels.

We have also been asked whether a clearer view could be given of the process of the receiving and delivering of a complaint and of the requirement of the commissioner—and, indeed, of Scottish Water—to be seen to be dealing with the complaint. There is a general wish, not necessarily for us to give powers and take away from any parliamentary scrutiny, but simply for us to give the customer an opportunity to ventilate through a proper process and be assured that they can deal with a consultation panel that has statutory backing to ensure that they are going to get an answer. They want us merely to firm up the panels in what is very much a public body.

You are giving the panels quite serious powers to deal with complaints, yet they are appointed by ministers and are unaccountable to the public. Or are they elected? How do the panels become accountable to the people whom they are supposed to represent if they are not elected by them?

Well, I suppose the same problem is faced by the water industry commission. That is a difficulty.

When we established Scottish Water, we tried to create a structure whereby, instead of the customer feeling that they had to deal directly with the board, which was employed by Scottish Water, there would be groups through which the customer could ventilate either a specific complaint or a range of connected complaints that might be better addressed together and put to the board and senior officials in Scottish Water in a more coherent way. That was the whole purpose of customer consultation panels at the outset. The intention was never to create a different democratic process, but simply to give the individual customer dealing with a range of local complaints a different method of gaining access to Scottish Water. The democratic control of Scottish Water rests with the Parliament.

I am slightly concerned by the issue and think that we will have to return to it before stage 2.

As a matter of courtesy, I am giving the committee my latest thinking on the issue, and I am happy to give evidence on that.

Clearly, when we present the proposals as amendments at stage 2, there will be opportunities for you to consider them in detail. I know that you have only recently had the letter, but I hope that there will be ample opportunity to consider the proposals. I am certainly not trying to impose them and rush them through, but merely to give an indication of our thinking at as early a stage as I can and to develop the role and powers of the water customer consultation panels.

We understand where you have got to in that process. The difficulty is that, when we took evidence on the bill and considered complaints, neither the water industry commissioner nor the water customer consultation panels expressed any enthusiasm for the proposals. We must think about how we take evidence on this point, because we have a tight stage 1 timetable and the Department of Trade and Industry is undertaking parallel consideration of the issue.

There are differences in the energy markets, and you have already made the point about Scottish Water being public, but we are conscious that the bill will set up a different system. We have taken evidence that there may be a need for a complaints process for domestic customers, but there may equally be a need for a complaints process for non-domestic customers, so we might want to take written evidence on that before we hit the stage 2 consideration. Once we are into the detailed discussion of the bill, there will be no opportunity for the committee to come up with amendments that it prefers as a way to solve the problem, so we want to take a step back rather than be rushed into a particular outcome.

I am happy with that; I am entirely in your hands. I would, however, like to clarify something: I think that you suggested—I do not want to put words into your mouth—that the water customer consultation panels do not want to move in the direction in which I am moving.

No. As I recall, we took evidence from the water customer consultation panels that they were not enthusiastic about being a repository for complaints.

I take your word for that and do not dispute it, but that comes as a surprise; we have had discussions with the panels, and the convener of the water customer consultation panels indicated quite a different view to us. In fact, he supported a development in the proposed direction. I am not suggesting that he agreed with every detail, but he did agree with the general thrust.

That evidence is in the Official Report of the discussions that we have had over the past few weeks with a range of people.

To come back to the consumer's point of view, some witnesses have argued that ministers should not introduce a bill to regulate competition, but should simply be prepared to defend Scottish Water against any legal challenge. In other words, they argue that its services qualify for exclusion from competition for compelling reasons of public policy. Why, minister, have you not chosen to defend your objectives for the industry by that route?

On a reading of the Competition Act 1998, it was my view that it was necessary to set out with total clarity and in legislation the precise way in which Scottish Water would operate and not simply await a challenge. I am not clear that, in such a challenge, I could point to the statutory framework within which Scottish Water operates and show why it meets the minimum standards of opening up competition under the Competition Act 1998. I understand the view that we should simply wait for the challenge, but the Water Industry (Scotland) Act 2002 does not indicate that we are compliant with some of the requirements of the Competition Act 1998.

We are dealing with an organisation that has hundreds of different sources of water and it is not really comparable to many of the other water companies to which the Competition Act 1998 applies. At this stage, the industry is merely settling down into a structure that might be workable. In other words, this is a catch-up phase. Is that not reason enough to argue that the Competition Act 1998 does not apply in this case?

No, I simply do not agree. With all due respect, although our detailed knowledge suggests that Scottish Water is still settling down, that is not relevant in this regard. It is in being and has a constitution and a structure. However, the fact that it falls broadly within the mischief of the Competition Act 1998 is a matter that we must address. The best protection for Scottish Water as a publicly owned company is to make its obligations clear in statute and to outline how it as a corporate body proposes to address the requirements of the 1998 act. That clarity will make it difficult, if not impossible, for anyone to challenge its operations or its compliance with that act's requirements.

Finally, is it the fact that the kind of challenges that might come would be from potential competitors for the delivery of parts of the service? It is unlikely that another Government body would challenge the act. Indeed, it is the people who wish to cherry pick who might question the response that you have given to the Competition Act 1998.

They might. There are two points at which such a challenge might be made. Without this bill, a potential competitor, cherry-picker or however you might wish to describe them could raise a challenge, because Scottish Water's constitution and regulatory framework is otherwise silent on the issue of competition under the Competition Act 1998. I have made it clear that I believe that Scottish Water would be vulnerable to such a challenge in the absence of the bill. Introducing the bill and making it clear that it complies with the minimum requirements of the Competition Act 1998 will greatly strengthen Scottish Water's position. Under the bill, it will be extremely unlikely that anyone would challenge Scottish Water, which means that we will avoid unnecessary legal and other expenditure defending such actions.

How do you see the role of competition in the supply of water services in Scotland?

Politically?

Yes.

I do not see any role in that respect.

Do you not see any role for competition at all?

We are talking about a publicly owned body that I want to operate at the maximum possible efficiency in order to deliver the highest-quality water and sewerage service at the most efficient price. I appreciate that we face huge hurdles and difficulties in getting there; in any case, I do not think that you and I are ever going to agree on this matter.

Have you targeted the bill to minimise any interference from existing legislation in how it frames water services in Scotland?

To fulfil my clear, unambiguous and public intention of having a publicly owned water company, I have sought to read, interpret and give effect to the Competition Act 1998 in such a way as to minimise potential competition against Scottish Water. I have no need to apologise for that stance, because it is entirely consistent with my public policy objective.

Are you content that the water industry commission, as defined in the bill, will ensure that the water industry in Scotland offers a pricing policy that is competitive with that of comparable organisations south of the border?

Yes.

Is that the only provision in the bill that matches your aims with regard to water service provision with the operation of the more competitive marketplace elsewhere in the UK?

That is indeed the whole purpose, as I indicated to Rob Gibson. Where there is a monopoly, the consumer is at risk. There might be several ways in which the customer might benefit from public ownership, but one of the risks is that the fact that the service provider is not subject to a degree of competition might ultimately affect the price at which the service is delivered. The purpose of the water industry commission is to bring to bear on the operations of Scottish Water comparative evidence from other similar bodies, in this case mostly located in England and Wales. Scottish ministers, in consultation with Parliament, deliver the policy objectives to Scottish Water. Scottish Water then produces its detailed plans and programmes, which are subjected to critical analysis by the water industry commission to ensure that they are delivered within the policy framework, while meeting all the objectives that are set out and coming in at the most competitive price. That seems to be a perfectly fair way of delivering a public policy objective.

Is that concept of competitive price the only criterion by which water services in Scotland are measured against a more liberated marketplace?

No. Most of the other matters that affect and are crucial to the consumer, such as drinking water quality, environmental requirements, and sewage discharge consents, are covered in statute. Scottish Water still has to meet its requirements to have regard to the best interests of the consumer and to public health, and other regulators deal with that. The drinking water quality regulator has a statutory duty to ensure that Scottish Water complies with its requirements with regard to drinking water. SEPA is a regulator with the specific responsibility of ensuring that Scottish Water meets its regulatory requirements. Consumer protection comes from several sources, one of which is the operation of the water industry commission.

The concept of a free—or more liberated—market has the potential to deliver several benefits and competitive pricing is one of them. I understand that you have explained clearly several times this morning that that will be tested against the views of the regulator and compared with other parts of the country. The most basic provision that a marketplace delivers within a market is the matching of supply and demand. Does the regulatory structure make any attempt to mimic that part of a market economy within the water industry in Scotland?

No, because demand in Scotland comes from people in the north of Scotland who want to have a public water supply and if it was left to the free market, there would be no such supply. In the south and south-west of Scotland, Scottish consumers demand a water supply and if it was left to the free market, again there would be no such supply. I am not in the business of defending the fact that Scottish Water does not meet the perfect model of supply and demand. I am suggesting that it is in the interests of the Scottish people to have their own water company to ensure that in a country that is 85 per cent rural, those people who live in rural areas are served just as well and to the same standards as are those who live in the conurbations. That is one of the aims of having a publicly owned water supply and I am happy to defend it.

Of course, we are—

Just a second, Alex. I do not want to hear a dialogue between you and the minister.

We can all join in.

No, we cannot all join in. It should be one at a time. We could go on about this endlessly.

I have one final point.

It will have to be a short final question.

The minister is telling us that instead of pursuing demand-led provision, he is going to pursue policy on matching supply with demand and on water service provision including sewerage.

I do not think that that is true at all. What I am saying is that I am driven not by a purely economic model but by a socioeconomic structure that requires Scottish Water to ensure that, ultimately, it is able to deliver a uniform quality of water supply and sewerage service throughout the whole of Scotland, irrespective of whether the supply would be supported in an ordinary economic model.

I have no hesitation in saying that that is for the benefit of Scotland. The fact of the matter is that even the publicly owned North of Scotland Water Authority could not have survived much longer. Its customer base was so low that it was financially impossible for it to meet its investment and other requirements in the kind of free-market model to which you allude.

But—

No, Alex. I am sorry, but I want to move on. If you have other issues to raise, I am happy to put them to the minister. We have the Finance Committee's report on the financial memorandum which, at the very least, should surface in public before we consider our report. That committee raised a number of major concerns and I want to give the minister a chance to say something about them before we reach our own conclusions on the subject.

I have two points to raise on the Finance Committee's report, the first of which concerns the cost of introducing competition into the Scottish Water set-up. The Finance Committee reported that it had had sight of independent research suggesting that the cost of introducing retail competition could be significantly more than the financial memorandum outlines. That committee is extremely concerned about the issue and seeks as a matter of urgency further information by way of a reconciliation because the figures are totally at odds with those in the memorandum. Do you have confidence in the initial estimates in the financial memorandum?

I am well aware of the issue. I appeared before the Finance Committee shortly after it received the information. It was based on independent work that was done by a third party in estimating the costs, particularly in relation to the costs of a switch engine, metering costs and other costs. I regret to say that, as we speak and despite my request—I do not know what has happened and I do not want to blame anybody—we have not received the detail of the independent report. Essentially, I am still operating on the information that we discussed with Scottish Water at the outset, which is the information that we discussed with the water industry commissioner and applied in respect of the cost estimates that are set out in the financial memorandum.

Our view was that it would be fairly simple to estimate the water retail market, particularly by comparison with the electricity market in which retailers need to estimate and balance usage every half hour, 24 hours of the day and 365 days of the year—a process that involves over 17,500 usage figures.

We took the view, the commissioner took the view and we understood that Scottish Water initially also took the view that the water sector was a simpler operation than other utilities. Until I have sight of the new evidence, I regret to say that I am unable to comment on it. I am happy to write to the convener on the subject, however.

That is helpful. It does not answer the question, but it shows that you are aware of the issue and will come back to us on it.

I am deeply concerned that this gap has arisen. I must also confess that I am puzzled about it. Given our close examination of the issues and the non-comparability of the water sector and other utilities, I am left in some doubt as to how the gap has arisen.

That clears up the matter for the moment. My other question concerns the regulatory impact assessment in the bill. Estimates of the retail gross margin for the average business customer are given in the region of 15 to 20 per cent of the total bill. However, a series of very different estimates was put in front of the committee. Some witnesses put the margin at between 4 and 8 per cent and others cited the work done by Ofwat, which put the average margin for English and Welsh water companies at 9.6 per cent. That is obviously important information for determining the accurate level of wholesale water charges and an important factor in terms of retail competition, but it is also an important factor in apportioning costs through Scottish Water. If the right margin is not set, domestic customers might have to pick up the tab. Those figures are quite at variance. Could you comment on them?

There are two aspects to that. The question of the different estimates is quite difficult, because they are estimates and no one has done detailed work on that. I concede that, but what are much more important are the points that you made in the latter part of your statement. Before the regime is ever established, it will be critical that both Scottish Water and the water industry commission are in possession not just of estimates—that will not do—but of detailed information. As you say, an inappropriate allocation of cost could have a serious bearing on the situation.

I shall ask Clare Morley to comment on that. You have given a good deal of thought to the nature of the regime, and broadly we do not disagree with you, but our concern is not so much about differences in the estimates but about the point at which cost allocations are fixed and the impact that that could have on Scottish Water having to recover those costs. In our view, those are the critical factors.

Getting that allocation of the retail gross margin wrong could have a serious impact on the wholesale price, and we have said that there will be a right of appeal to the Competition Commission for that to be challenged. However, it is important to remember that the water industry commission will be setting charge limits. It is possible that the wholesale price that is set will have to be challenged, but as price limits will be set for all customers, including domestic customers, there will be no room for reshuffling within customer categories by Scottish Water if the charges are wrong. If the charges are wrong, they will have to be contested with the Competition Commission. Increased charges cannot be imposed on domestic customers in an attempt to balance the books. We believe that the bill protects customers—domestic customers in particular—from any adverse impact.

I had understood that it would be the domestic customers who could suffer if the margins were set at the wrong level. That is the evidence that the committee heard.

If the margin was set too large, so that Scottish Water was left bearing more costs than it felt it could, it would be Scottish Water wholesale that would be left short, but it would not be open to Scottish Water to try to make that up through domestic customer bills. It would have to seek an interim determination or challenge the initial determination to get more resources.

Would that not undermine Scottish Water's effective operation as a company?

Getting the margin wrong would undermine Scottish Water, but there is access to the Competition Commission to appeal that.

I am just concerned that there is disagreement at the outset as to where you set the levels. One of the witnesses suggested that Scottish Water was being set up to fail, which was vigorously denied by Scottish Water. However, there is clearly some nervousness about getting those figures right at the outset so that we do not have an unstable organisation. You have, quite rightly, outlined the Government's objectives and why you are setting out the framework in the bill, but if the figures are wrong, it could become a very difficult issue to resolve.

I have to go back to my opening remarks. The estimates are just that. If the bill is passed, the commission, Scottish Water and others will have a considerable amount of work to do not to deliver an estimate but to deal with actual figures. I can understand people perhaps making a speculative comment based on a range of margins, but I do not agree with the comment that Scottish Water is being set up to fail. Nevertheless, people may say, "Ah, well, you just picked one of those numbers." That is not how the process will work. The commission and Scottish Water will be dealing with numbers. Of course the commission will then be under a slightly different pressure once the bill goes through. Previously, no one with any particular expertise would necessarily be challenging it but, by the time the bill goes through, Scottish Water will have access to the Competition Commission, which will put real pressure on the water industry commission to get things right first time.

I am just worried that it will not. It has been suggested that the commissioner's estimates are out at the moment.

They might be, but estimates are estimates. I am suggesting that the commissioner has not spent the amount of time with Scottish Water that will be required to get the allocation right once the bill is through, which I think he would acknowledge, because the process will be different.

So what you are outlining will happen after the bill has been approved.

Yes, the commissioner is engaging consultants whose task it is to help him to prepare a means of having better regulatory information for his accounting purposes. That work is in hand. It will enable him to have a much more robust grip on the figures when it comes to doing the proper allocations.

The Finance Committee has expressed concern that the water industry commissioner and Scottish Water have different views of Scottish Water's efficiency. Do you have a view on how that might be resolved?

They have disagreements, but I suppose that that is always going to be the case. There is no question about it: Scottish Water after two years is very much more efficient in absolute terms than it was and it feels strongly about that. That is slightly different from the view of the water industry commissioner, who is constantly updating his comparator with reference to the performance of other companies. He might take a view that in relative terms there is still much to be done and he will be redefining his targets. I do not regard it as entirely alarming for Scottish Water to have a view that it is making real progress and improving its efficiency, while a regulator, looking at the comparative model in order to bring pressure to bear on Scottish Water, takes a slightly different view. I do not regard that as either necessarily unhealthy or something about which we should be too surprised.

The bill neatly divides customers into domestic and non-domestic. Given that the Justice 2 Committee—the other committee of which I am a member—is considering the Fire (Scotland) Bill, I realise that there is also the fire brigade to consider. We took evidence from fire brigades and it seems that they are responsible for the upkeep of hydrants and maintenance of ring mains, which are maintained by Scottish Water, which then charges the fire brigades. The fire brigades are not terribly keen on that arrangement. Are there other special arrangements with other public services that do not fit into the bill?

We are not aware of any. The fire brigades provide an essential service for which hydrants have to be provided. One of the major issues, which I am sure you have heard about in evidence, is the enormous cost of vandalism to hydrants. I might have to check my figures, but I think that in the Glasgow area last year it cost something in the order of £1 million just to repair fire hydrants that had been vandalised.

Yes, and that cost falls on the fire brigades rather than on Scottish Water, which is presumably why the fire brigades are not terribly keen on it.

I rather suspect that Scottish Water would not be too keen to take on the fire brigades.

I suspect that we have to sort out the vandals.

Indeed.

Rob Gibson has a brief follow-up question.

It is on the same point. The servicing of hydrants has to take place regularly. How often does servicing take place in areas in which there is no vandalism, such as rural areas? Can the fire service rely on the hydrants in areas in which usage and servicing is minimal? You might not be able to provide an answer just now.

As Maureen Macmillan said, financial responsibility for hydrants rests with the fire brigades. In certain parts of the country, there are arrangements between the fire authority and Scottish Water and service level agreements set out minimum standards for the servicing that ought to be carried out. That is a matter that can properly be dealt with jointly by the fire authorities and Scottish Water. I do not think that any new provisions are required; certainly, no such provision is needed in the bill.

I want to get your views on three issues, the first of which is the charge determination process. The bill seeks to end Scottish Water's freedom to negotiate individual agreements with customers. Will you outline the reason for that change, which it is clear is an issue for some of the larger-volume customers who, if they do not see a deal on the table, will go automatically to an alternative supplier? There are obviously implications from that for Scottish Water's revenue, as well as for its existing customers.

We are not trying to interfere with business decisions. There are situations in which authorised departures from the charging regime will not be prevented and will be justified. Some large customers in the chemicals and distilling industries have internal arrangements whereby they take steps to reduce the cost of being served by Scottish Water. The bill does not prevent us from reaching different charging arrangements that take cognisance of the fact that those customers have their own water plants to deal with certain aspects of water provision. However, there are situations in which those special arrangements simply require cross-subsidy by other smaller customers. We are trying to be fair to all customers and to secure harmonised charges throughout Scotland.

I was thinking of the implications for smaller customers of some of the bigger customers going off network or using alternative suppliers. That could have an impact on Scottish Water's ability to serve smaller customers for the same cost. I understand the logic of what you are suggesting, but I am asking about possible unintended consequences.

There are several other issues that must be taken into consideration. Some of the older arrangements were put in place when the relevant water authority could not have claimed to have been able to deliver the service at anything like an efficient cost. On comparability, the real issue is about driving forward with efficiency in capital procurement, capital delivery and revenue costs within Scottish Water. In my view, the big issue in being able to retain customers is efficiency—efficiency in a broad sense. We do not want to cut across quality and other indicators and factors, such as those that relate to sustainability. Unwinding individual arrangements could not and would not happen overnight; it would have to be done gradually. I cannot remember what period we have set. We could not interfere with existing arrangements—they would have to run their course. We could not break a contract.

So no one who has negotiated a deal will lose out immediately; the provision in the bill is just about new deals.

Yes.

The Federation of Small Businesses suggested that the removal of Scottish Water's duty to act as supplier of last resort for non-domestic customers could be a problem for people who have previously been declared bankrupt. Potentially, that could prevent new businesses from getting access to water supplies. Will there be safeguards in place to avoid that happening?

The bill provides for Scottish Water wholesale, rather than Scottish Water retail, to act as supplier of last resort. That is to ensure that Scottish Water retail will be on a level playing field with any other new entrants. The bill includes detailed provisions to ensure that disconnection happens only as a last resort and after a reasonable period. However, the view taken in the bill is that there might be circumstances in which supply should be cut off.

The question was more about supply for new businesses. Would a person who was previously declared bankrupt or had a company that went out of business be given access to the network?

It will be for the licensing regime to ensure that no customer is put in that position and to ensure that new entrants are under an obligation not to pick and choose merely the attractive customers.

So the licensing system will have safeguards to protect potential businesses.

Yes.

My final question is on the new ministerial powers of direction in section 19. What is it envisaged that those powers will be used for? It was suggested to us that section 19 provides ministers with very broad powers, which could perhaps be defined more narrowly. Can the minister give an example of how the power to direct Scottish Water might be used?

Following the extensive discussion that has been mentioned this morning, we will arrive at a view on the objectives for Scottish Water's investment programme and, under section 19, we will instruct and direct Scottish Water to meet those objectives. Following the consultation on the principles of charging, we will direct Scottish Water and the water industry commission to adopt the principles that are agreed in determining final charges. In setting the principles for charging and the objectives for the investment programme, we will have regard to all the factors that have been set out. There will be a distinction between the Executive, which will set the objectives, and Scottish Water and the water industry commission, which will set the framework within which those policy objectives are to be discharged.

I want to check whether we are reading the bill correctly, given that we had assumed that those directions would be issued under section 18. I think that the minister's answer is what we expected, but I am trying to work out which section provides for that set of directions. We had assumed that they were provided for in section 18.

Section 18 sets out the new charge determination process and it provides that the water industry commission must fully fund all Scottish Water's functions, including any functions provided for by a direction made under section 19. Section 18 also provides for a statement on charges. The two sections are intricately connected. Section 18 cross-refers to the direction power in section 19.

Is that the only reason for the inclusion of section 19? Does section 19 not provide wider powers?

The powers of direction are mentioned separately because they are inserted into a different place in the Water Industry (Scotland) Act 2002. The bill ensures that all the objectives that are set for the industry through the quality and standards process are functions that have to be funded by the water industry commission.

That is a helpful clarification.

I have two questions on reporting back to the Parliament. First, the Water Act 2003 places a duty on the secretary of state in England and Wales to report to Parliament every three years on what steps are being taken to encourage water conservation. Why does the bill not include a similar provision? Secondly, is the minister minded to impose a duty on SEPA to report to the Parliament under part 3 on what progress is being made on coal mine water pollution?

I am much more persuaded that Scottish Water should be required to report to the Parliament on its functions and accounts annually. Indeed, the chairman and chief executive of Scottish Water are required to report to the Parliament, presumably through this committee. That is a better way for Scottish Water, which is a publicly owned company. I am intrigued by Mark Ruskell's passion for importing all the Westminster sections into the bill but, with respect, I am bound to say that the requirement that Scottish Water present an annual report to the Parliament and that its officials appear before the Parliament to be subjected to questioning presents an opportunity for monitoring progress that is far more alive and alert than a requirement on a privatised business to report to Parliament every three years.

Under the Water Environment and Water Services (Scotland) Act 2003, SEPA already has powers to address water pollution from disused mines and to ensure the ecological status under the river basin management plans.

Okay, that is excellent. Our questions on the high principles and minor details have been exhausted, so I thank the minister and his team for taking us through exactly what is meant by the bill. It is helpful to have the authors of the bill explain how its different sections interrelate.