Evidence to the Environment and Rural Development Committee on the Water Services
Etc. (Scotland) Bill.
STUC welcomes the opportunity to give evidence to the Scottish Parliament Environment
and Rural Development Committee on the Water Services (Scotland) Bill. This response
needs to be seen in the context of the STUC's and our affiliates submissions to
recent Scottish Executive consultations on the water industry and in particular
the consultation on the Draft Water Services Bill.
is the latest of a number of legislative developments affecting the water and
sewage industry in Scotland including the establishment of a public water corporation,
Scottish Water and a revised regulatory framework. This bill focuses on
changes to the regulatory framework and the development of competition in networked
water and sewage. Competition already exists in off-network services.
this context it is important to recognise the scale and speed of change that has
already taken place in the industry and the importance of a period of stability
to bed in the current structure.
Part 1: Water Industry
Commission for Scotland
welcomes the establishment of the Water Industry Commission for Scotland as a
corporate body replacing the Water Industry Commissioner. Experience elsewhere
has demonstrated that regulatory frameworks that rely on one person have not operated
satisfactorily and we endorsed many of criticisms of the current arrangements
in the recent Finance Committee report.
model proposed in the bill has many similarities to the regulatory framework that
exists in private utilities. These have been subject to some criticism not only
from the utility industry and trade unions but also as reflected in the recent
House of Lords report on regulation. Other ideas from the think tank Demos include
the concept of adding ‘public value'.
essence the problem has been that regulators promote competition to the detriment
of other factors. There has been an over emphasis on price and efficiency with
little consideration of the impact their decisions may have on employment and
other social and environmental concerns. These economic models can also be in
conflict with government policy as we have seen recently over the transmission
loss proposals from Ofgem that would have ended the nascent renewables industry
in Scotland. Schedule 1 does not set out the type of person that should be appointed
to the WIC. Membership should reflect the wider public policy considerations and
not simple economic factors.
Getting the right framework
and objectives is all the more important in a public service. The objectives of
the water industry are of wider concern that simply those connected to the current
system as defined in section 1 of the bill.
STUC welcomes the provisions in section 3 allowing regulations to define how the
balance of costs between Scottish Water and developers will be calculated. We
believe there is a strong case for developers meeting a much greater share of
the cost of new water and sewerage services so that new development can proceed
without detracting from the urgent need to renew the existing infrastructure.
2: Provision of Water and Sewerage Services
driver for this legislation is the UK Parliament's Competition Act 1998 that seeks
to prevent the restriction or distortion of competition and the abuse of a dominant
market position. The STUC and our affiliates have previously highlighted the danger
of this ill thought out legislation for essential public services. In essence
the Water Services (S) Bill seeks to implement the provisions of the Competition
Act whilst minimising the adverse impact on Scotland. It should however, remind
the Scottish Parliament to be vigilant about other international competition initiatives
that impact on public services. In particular, reforms of the EU internal market
The policy basis for this
section of the bill takes a more realistic view, than the original Water Services
Bill consultation in 2001, on the alleged benefits of competition. Experience
in other utilities has shown that the alleged benefits are more apparent than
real and comes at a significant cost to the consumer. The STUC rejects the view
that competition in essential utilities brings benefits to consumers. There is
no evidence to support this often-quoted position.
Competition Act 1998 introduced a new framework for competition bringing into
domestic law (this is a reserved power to the UK parliament) provisions which
enact European law on this issue. In particular it introduces new sanctions for
anti-competitive behaviour. The Act applies to Scottish Water and is enforced
by the Director General of Fair Trading (DGFT) as the WIC in Scotland does not
have the same powers as the water industry regulator in England and Wales, OFWAT.
The Act includes provisions for
exemptions and exclusions on a number of grounds. The STUC believes that the provisions
of Schedule 3 (7) remain a sound basis for an exclusion under the Competition
Act. Water and sewerage is an essential service in a civilised society and competition
puts that service at risk, particularly for disadvantaged customers. The public
policy grounds could relate to rural, economic and social exclusion strategies
under this heading. In addition the Executives environmental objectives will be
difficult to achieve in a competitive framework and this provides a further public
policy basis for an exclusion.
common carriage on the public networks
STUC agrees that the risks to public health and the environment outweigh any foreseeable
benefits from allowing access to public water and wastewater systems. Our affiliates
have previously highlighted some of the many technical difficulties in achieving
common carriage including:
existing mains have no spare capacity for additional water
Fraser Report (Burncrooks) recommended the zoning of water from different sources
as a precaution against contamination.
for proving and compensating for mains pipes fractures caused by third party supply
e.g. pressure surges.
- Responsibility for boosting
- Backflow protection
to stop accidental or fraudulent back-syphonage
of the cost of leakage or lost water e.g. misuse of fire hydrants.
size incompatibility when new sources are attached to the mains.
Water would have to be responsible for managing a comprehensive access code to
ensure that there was adequate supply. This code would be enormously complex covering
all possible situations including seasonal demands, bursts, drought provision
etc. There would also have to be costly physical systems in place to isolate new
entrants supply and provision for ‘last resort' supply.
understand that the provisions of s4(5) are intended to cover contractors working
for Scottish Water. The wording could however be interpreted to allow a somewhat
wider private sector access.
consequences of common carriage even with costly systems intervention could include
at worst contamination of water supplies or at best interruption and damage to
the water and sewage infrastructure. The public health consequences are obvious
and therefore the provisions in the bill prohibiting common carriage are sensible.
retail competition for households.
STUC agrees that retail competition poses risks for households.
household customers water charges, linked to Council tax bands, reflect broadly
the ability to pay. The current arrangements include a discount for single adult
households. The STUC notes that revisions to the current banding system will be
considered as part of a wider review of local government finance. Competition
would bring separate water charges and the loss of the essential progressive charge
basis, which is in our view a requirement for an essential public service. There
is no practical alternative to piped water and sewage disposal.
arrangements in place in other competitive utilities for disadvantaged consumers
are generally very limited. For example fuel poverty still impacts on one in six
Scottish households despite the excellent measures taken by the Scottish Executive
to address this issue.
consultation paper rightly identified the serious risk that new entrants to the
market would ‘cherry-pick' high-banded properties. This has also been the experience
in other utilities where existing suppliers have been forced, because of competition,
to chase ‘high value' customers at the expense of other consumers. Not only would
charges increase for most consumers but Scottish Water would be left with stranded
assets brought about by off network provision.
STUC therefore agrees that competition would develop in a way that would not benefit
all customers and welcomes the provisions in the bill prohibiting this form of
The STUC does
not support the introduction of retail competition in non-households. The 160,000
premises covered by this competition are a significant part of Scottish Water's
operation. Business separation (s12) will be a further and unwelcome disruption
to the corporation, which is attempting to address the long-standing problems
facing the industry.
Some of the
main problems include:
in the energy industry shows that business separation is an expensive business.
The loss of integrated operations, economies of scale, rebranding etc all add
to the costs charged to customers.
- The financial arrangements for business separation are
crucial to the viability of the proposed retail arm and the wholesale organisation.
The assumptions built into the Regulatory Impact Assessment give us considerable
cause for concern. The efficiency gap calculations (para 14) are based on the
2002 estimates and the position has changed significantly (from a claimed 42%
to less than 10%) since then. The size of the retail business is also crucial.
Para 23 assumes the full retail segment is £109m (15%) compared with Ofwat's estimate
of 8% for England and Wales. This could lead to unnecessary burdens on the retail
arm and a weakening of the core Scottish Water organisation. In essence both organisations
would be set up to fail if this financial structure is put in place.
- A whole new industry is created with new customer service,
billing, marketing and sales operations, all of which divert resources which could
be more effectively deployed improving our water and sewage networks.
- Further systems will have to be established to allow switching
between suppliers. This has caused chaos in the energy market and will inevitably
do the same in water and sewage. The provisions in s10 are particularly vague
and the costings in the financial memorandum are optimistic in the extreme.
- As Scottish Water will have a statutory obligation to supply
everyone they will be left with disjointed operations. Many of the cherry-picking
arguments set out above also apply to non-household competition. Most of the 160,000
properties are small businesses in high street locations. New entrants will inevitably
focus on larger consumers or those in geographically concentrated areas such as
out of town estates in urban areas. S15 will also place additional costs on Scottish
Water that should be spread across all suppliers.
- The WIC will gain further powers to directly set wholesale
charges. Current experience indicates that this may not be wholly beneficial to
either customers or the industry. Unlike other utilities the water and wastewater
systems are not organised into a cohesive network. The industry has not diverted
essential investment resources into management information systems that are an
integral part of a regulated market. This is reflected in the WIC's reports on
Scottish Water's alleged performance. Despite the apparent detail the judgements
are based on limited data. In the privatised utilities the companies establish
extensive regulatory functions to engage with the regulator. Again all of this
would be recharged to the customer.
- Whilst not set out in this bill (because it is a reserved
function) it is intended that any differences over charges between the WIC and
Scottish Water will be referred to the Competition Commission. This body has no
experience in dealing with a public service and in particular interpreting the
broader objectives that Scottish Ministers can set under s18. Their expertise
is in the economic and competition sphere. The STUC takes the view that these
are properly public policy interpretations that should be decided in Scotland
and not handed over to an inappropriate London based organisation.
STUC broadly welcomes the provisions of the bill as being a more realistic recognition
of the realities of the industry that those set out in the original Water Service
Bill consultation in 2001.
problem relates to the proposals for non-household retail competition. We suspect
that this more modest proposal reflects a concern to be seen to provide an element
of competition in accordance with the philosophy inherent in the Competition Act.
However, the proposals still constitute a major upheaval for little value to the
consumer. It is also a further stage along the road to the full privatisation
of Scotland's water.