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Strategic Review of Water Charges 2006-10

The UNISON Scotland response to the Water Industry Commissioner for Scotland Draft Determination on the Strategic review of Charges 2006-10

September 2005

Introduction

UNISON is Scotland's largest trade union representing over 150,000 members. In addition to our membership in the water industry, UNISON represents staff employed in many sectors that rely on the effective delivery of water and wastewater services.

This paper constitutes UNISON Scotland's response to the draft determination published by Water Industry Commissioner for Scotland in June 2005.

We have not attempted to address all the issues covered in the seven volumes of information that constitute the Draft Determination. In practice only Scottish Water and the WIC are resourced to do that. Instead our approach is to highlight issues identified from consultations with our members who deliver the service and have an understanding of the actual water and wastewater facilities in Scotland. In addition we have included our wider citizenship concerns over the impact the Draft Determination will have on the publicly owned Scottish water industry.

Overview

When the Deputy Environment Minister announced his priorities for the 2006-2014 investment programme we expressed our concern that a massive investment programme, over a short time scale, without real term increases in charges was a ‘magic circle' that could not safely be delivered.

The WIC's draft determination goes even further. In doing so it puts the successful Scottish public sector model at grave risk. It is to be anticipated that there will be an expectation gap between any regulator and the organisation they are regulating. However, in this case the difference represents a yawning chasm. Not just as we might expect over the scope for further efficiencies, but over the scope of maintenance and replacement of water and wastewater facilities.

Given the previously expressed views of the Water Industry Commissioner in favour of privatisation, the appointment of a Chair and members to the new Water Industry Commission from the privatised English system, we have an inevitable concern that this charge determination is aimed at undermining the Scottish model. The frequent references in the Draft Determination to the largely privatised Welsh model (Glas Cymru) may also be significant in this respect.

Operational Expenditure

There is a massive gap between the Scottish Water Draft Business Plan (SWDBP) and the Draft Determination (DD) in respect of operational cost. Whilst the SWDBP provision for bad debt would seem unnecessary if prices remain below inflation the other differences are more difficult to understand.

In particular, the DD cut of £8m for the alleged benefits of business separation. We can find no evidence to support this figure and our experience in the energy industry together with independent reviews (House of Lords Select Committee) would indicate that this cut is based more on ideology than fact.

There also appears to be large differences in the scope for new operational expenditure between the two documents. The WIC's view appears to be that Scottish Water is ‘risk adverse' in this and other areas. Customers facing supply interruptions and sewer flooding may prefer a little less risk!

A significant element of new operational costs are outwith the control of Scottish Water. Energy prices are rising rapidly, SEPA charges and many others appear to have been given insufficient weight. We have previously highlighted the many differences between the English and Scottish water and wastewater systems. These are identified as ‘special factors' in the DD. However, some have been given no allowance and others an allowance well below the assessment set out in the SWDBP.

Investment

Again there is a huge gap between the SWDBP and the DD. Even allowing for very challenging efficiency savings there are major scope reductions.

Scottish Water's approach is based on an understanding (albeit not perfect) of real assets and their condition. The WIC's approach uses econometric models. The water trade unions through the STUC have previously commissioned research from Glasgow University to highlight the limitations of this approach.

Our members on the ground are concerned that the consequences of this reduced scoping will result in water quality failures, unplanned interruptions to water supply and on the waste water side a significant increase in internal flooding, sewer collapse and the risk of pollution. Some of the anticipated asset life estimates implied in the DD is simply not adequate to maintain serviceability.

In addition, if insufficient allowance is made for the maintenance of new investment then it will have to be replaced that much earlier. Precisely what has happened in England, hence further rounds of investment and associated costs having to be picked up by charge payers.

On drinking water quality we note that the reporter reached a view that the degree of over scoping was in the range of 14-15%. The WIC then commissioned a further view from Faber Maunsell (FM) that claims the over scoping was in the range 45-55%. Our position is that the reporters view is at the extreme of achievable scoping reductions. We are aware of a number of concerns over the FM approach and would welcome independent analysis of that report.

Similarly on unsatisfactory intermittent discharges (UID) investment the FM approach claims a 58% over scoping and the WIC 64-83% based again on benchmarking with England. However, reviews of actual UIDs and even the early costs in England supports the UID expenditure set out in the SWDBP. The consequences of the massive cuts proposed in the DD could be very serious, particularly for Glasgow, where flooding and Clyde water quality is an important issue.

Other Issues

We note that the DD includes the introduction of the English Overall Performance Assessment (OPA). This includes a range of targets relevant to the industry in England, but not even consulted on in Scotland. We are unclear why this system is being introduced in Scotland when it is for Scottish Ministers to determine the targets. The regulator's task is to measure performance against those targets, not to determine a whole new range of targets of their own making. This appears, not for the first time, to be a further attempt to introduce the English model to Scotland. The risk in this approach is that it creates managerial incentives for Scottish Water to focus on the regulators targets, not those of democratically elected ministers.

The revenue calculations in the DD appear to make a number of optimistic assumptions regarding growth in the customer base. In particular the growth in SME customers which if it occurs at all is likely to be at the sole trader end of the SME scale with very little positive impact on Scottish Water's revenue base.

For the new licensed retail business almost no internal preparation or restructuring costs have been allowed. Other additional costs have been reduced and we have commented above on the absence of evidence to justify the alleged ‘additional' efficiency that business separation brings.

There are provisions for interim determinations if material changes arise outwith management control. The DD appears to import the English ‘Notified Items' approach that seeks to limit the list of items that can trigger an interim determination. Yet again this appears to introduce mechanisms outwith the Scottish model. The WIC also appears to be proposing an involvement in the management of reserves, an issue that is properly a matter for Scottish Ministers and Scottish Water.

Conclusion

Our primary concern is the massive gap between the SWDBP and the DD. The main reasons for this appear to be scoping reductions brought about by a conflict between an assessment of actual requirements and econometric models used by the WIC. To this must be added over ambitious efficiency requirements and the importation of inappropriate elements of the English regulatory system to Scotland. The consequences are poor quality assets and inadequate maintenance, all impacting on customer service and safety.

UNISON Scotland believes that it may be possible to achieve the overall price and investment objectives set by Scottish Ministers but only over a longer time scale. We remain concerned that the Draft Determination is an ideologically inspired attempt to undermine the Scottish public sector model.

For further information please contact:

Matt Smith, Scottish Secretary
UNISON Scotland
UNISON House
14, West Campbell Street,
Glasgow G2 6RX
Tel 0845 355 0845 Fax 0141 342 2835

e-mail matt.smith@unison.co.uk

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