Managing Change in the Water Industry: A Consultation Paper

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A. EXECUTIVE SUMMARY

A1. This paper considers the development of competition in the Scottish water sector and sets out the Scottish Executive’s proposals for responding to them. Comments on any of the issues raised in the paper are invited. They should be submitted to the Scottish Executive no later than Wednesday 4 September 2000.

A2. Scottish water and sewerage legislation is cast in terms of public water and sewerage services being effective monopolies. Since 1996, the delivery of these services has been the responsibility of the three publicly owned water authorities.

A3. The water authorities are accountable to Scottish Ministers and through Ministers to the Scottish Parliament. As public corporations they are subject to financial control by the Scottish Executive. They are regulated by the Scottish Environment Protection Agency (in respect of wastewater discharges), and by the Scottish Executive (in respect of drinking water quality). Since 1999 economic and customer service regulation has been the responsibility of the Water Industry Commissioner for Scotland.

A4. In common with the UK water sector generally, competition in the Scottish water sector has been developing for some time. The Competition Act 1998 is encouraging this trend. In particular, it holds out the prospect of third parties gaining access to the water authorities’ water and sewerage networks. The issues raised by increased competition in England and Wales are the subject of "Competition in the Water Industry in England and Wales", published on 13 April by the Department of the Environment, Transport and the Regions and the National Assembly for Wales.

A5. The current statutory framework for Scotland was not established with competition in mind. As a result, it does not make any allowance for third parties delivering services through the public networks. This creates considerable uncertainties as to whether, and if so under what conditions, third parties can have access to these networks. The Scottish Executive believes that the framework needs to be revised to remove this uncertainty. It also sees a revised framework as the means of ensuring that all types of customer enjoy the benefits of competition; that competition does not develop at the expense of particular groups, such as those on low incomes; and that public health and the environment continue to be safeguarded. It has identified six main areas where change appears necessary in meeting these objectives:

• establishing a licensing regime to ensure that new entrants gaining access to the public water and sewerage networks are fit and proper for these purposes;
• ensuring new entrants are liable to criminal proceedings in the event that they supply unwholesome water, in the same way as the water authorities are at present;
• defining the water authorities’ role in protecting network integrity and in acting as supplier of last resort;

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• giving the water authorities the legal power to allow new entrants access to their networks;
• developing a framework of charging for access to the public networks that is cost reflective, that ensures the network is soundly financed and that reflects the additional responsibilities placed on the water authorities;
• amending the remit of the Water Industry Commissioner in relation to licensing water authorities and new entrants.

A6. In addition to giving the Water Industry Commissioner the duty of licensing operators in a competitive market, there is also the issue of whether he should have a role in the enforcement of competition legislation in the Scottish water sector. There are also questions about the future basis of drinking water quality regulation.

A7. The Executive is committed to the water authorities remaining in public ownership. As owner of the authorities on behalf of the public, it wants the authorities to be able to compete effectively and fairly with any private sector entrants to the market. This means the authorities matching the private sector in terms of efficiency and responsiveness to customers’ needs. It also means competing with the private sector to provide consultancy services to non-domestic customers. The authorities are already able to form and become involved in ventures, either alone or jointly, that allow them to exploit their expertise. As the market for these services develops, the Executive is keen that the authorities should be able to respond quickly to any demands that arise. To assist in this it is widening the range of activities that can be covered by these ventures and is streamlining its procedure for approving such ventures.

A8. The Boards of the water authorities have played a crucial and valuable role in managing the process of change from local authority service to public corporation. However there is a case for considering whether the current size, composition and role of the Boards is right for the challenges now facing the authorities.

A9. Section I raises the question of a more radical restructuring of the water authorities. The Executive is not persuaded that this is a priority. It believes that the immediate challenge for the authorities is clear: to manage their businesses as efficiently as possible to provide best value to customers and to compete effectively with the private sector. Radical restructuring at this stage would risk distracting the authorities’ management from this. Given the rapidly changing environment in which the authorities now operate, the Executive recognises that more radical options cannot be ruled out permanently.

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