Managing Change in the Water Industry: A Consultation Paper

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C. WATER INDUSTRY IN SCOTLAND – CURRENT POSITION IN SCOTLAND

(i) Legislation

C1. The public water and sewerage infrastructure in Scotland is owned and operated by the 3 Scottish water authorities (North of Scotland Water, East of Scotland Water and West of Scotland Water). The Authorities were established under Part II of the Local Government etc. (Scotland) Act 1994 (the 1994 Act). They are public corporations of a trading nature accountable to Scottish Ministers and through Ministers to the Scottish Parliament.

C2. The legislation establishing and providing for the regulation of the authorities does not anticipate any other parties either using directly or in other ways benefiting from the infrastructure, nor does it provide specifically for competition in water and sewerage services. Though the water authorities are not specifically prohibited from allowing a third party to use their networks, the absence of a specific power in this area suggests that as creatures of statute they may not have the legal power to allow such use. What is clear is that were they to do so, they would remain criminally liable for any breach of water quality legislation committed on the networks by a third party using those networks.

C3. Between them, the authorities, through their networks of pipes, supply over 95% of Scottish households with water and over 90% with sewerage services. In charging for the provision of these services, the 1994 Act places on the authorities the duty to "endeavour to ensure" that they show no undue preference or undue discrimination between customers or groups of customers. Households not connected to the authorities' systems are dependent on their own private arrangements for water supply and wastewater disposal.

C4. The authorities also supply services to the non-domestic market. Customers in this market, particularly those using large volumes of water or discharging large volumes of waste, are sometimes able to make arrangements for the provision of these services to be delivered separately from the public networks either at their own hands, or by specialist contractors.

C5. The water authorities have vertically integrated structures, which means that they undertake every aspect of the provision of water and sewerage services (i.e. the abstraction, storage, treatment, distribution and delivery of water; and the taking away, treatment and disposal of sewage). Unlike the electricity and gas industries, there is no national network for transporting water or sewage.

C6. The water authorities are subject to a specific body of Scottish water and sewerage legislation. Their duties in respect of water supplies are set out in the Water (Scotland) Act 1980 (the 1980 Act). The 1980 Act places a duty on the authorities to provide a supply of wholesome water to every part of their areas of supply where a supply of water is required for domestic purposes and can be provided at reasonable cost. For other than domestic purposes a water authority is required to provide a supply of water on reasonable terms and conditions to the owner or occupier of any premises within its area of supply who requests it. The 1980 Act makes provision for water authorities to apply to Scottish Ministers to make an Order for the acquisition of water rights to allow them to access water resources. There is at present no overarching system of abstraction licensing in Scotland.

C7. Similar provisions are contained in respect of sewerage in the Sewerage (Scotland) Act 1968. The 1968 Act makes it the duty of a sewerage authority, where it is practical to so at reasonable cost, to provide public sewers for draining their area of domestic sewage, surface water and trade effluent, and to provide treatment for dealing with the contents of their sewers.

(ii) Financial Framework

C8. As public corporations of a trading nature, the water authorities are subject to a specific framework of financial controls that are administered by the Scottish Executive.

C9. Water authorities are funded by charges paid by customers, loans from Scottish Ministers and grants made available for specific areas of work. The borrowing and grants issued to the water authorities score against the Scottish Assigned Budget.

C10. Resources to fund both capital and operating expenditure is therefore determined by the ability of the water authorities to raise revenue via charges and the availability of resources from the Assigned Budget. The water authorities agree charges schemes with the Water Industry Commissioner, within charges caps determined by Ministers. This determination is made after advice from the Commissioner on the need for investment in order to supply drinking water and to treat wastewater to the standards required of the EC directives. The availability of loans and grants is dependent on ministerial decisions about the allocation of the Scottish Assigned Budget.

C11. In 2001-02, the budgeting and accounting of Government expenditure will change from a cash to a resource basis, measuring resources consumed rather than those bought. The new regime will be in line with the water authorities’ accounts, which are already prepared on this basis. It will mean financial control on the authorities being exercised in terms of capital expenditure and profit levels.

(iii) Regulatory Framework

C12. The regulatory framework for water services in Scotland reflects the public sector nature of the services. Its elements are:

• the Water Industry Commissioner for Scotland, who covers economic and customer service regulation of the water authorities;
• the Scottish Executive, which regulates drinking water quality; and
• the Scottish Environment Protection Agency, which regulates discharges into the environment.

C13. The Water Industry Commissioner was established under Part II of the Water Industry Act 1999 (the 1999 Act). The Act describes his functions in relation to the 3 water authorities. It gives him the general function of promoting the interests of the authorities' customers, and also the function of advising Ministers about the level of charges needed by the water authorities. It does not provide for him to regulate any other undertakers who might make use of the authorities' networks through common carriage, or to promote the interests of other undertakers' customers. Nor has he any power to require information from undertakers other than the water authorities.

C14. Unlike the Director General of Water Services in England & Wales, the Commissioner has no power to appoint additional undertakers to operate in Scotland. The Commissioner also differs from the Director General in that he has no powers of application or enforcement under the Competition Act 1998 (the 1998 Act).

C15. While the Water Industry Commissioner is responsible for promoting the interests of the water authorities' customers through economic and customer service regulation, he is not responsible for water quality or environmental regulation. The Scottish Environment Protection Agency (SEPA) is responsible for the control of pollution. The Water Services Unit at the Scottish Executive enforces the legal standards and other requirements for drinking water on behalf of Scottish Ministers. Currently the Scottish Executive has no power to regulate the quality of water added by third parties to the authorities' pipes, except, indirectly, through its regulation of the authorities.

C16. The regulations governing drinking water set standards for water quality and prescribe monitoring requirements to check compliance with the standards. Where the standards are not met, Ministers make an Order under the Water (Scotland) Act 1980 declaring the authority to be in default and directing them to remedy the default within a specified time unless the authority has given a legally binding undertaking to bring about compliance as soon as practicable. If an incident occurs that leads to a serious failure of drinking water quality, the incident may be reported to the Procurator Fiscal, who will determine whether it is in the public interest to bring a criminal prosecution.

C17. On the wastewater side, the Scottish Environment Protection Agency (SEPA) sets consent conditions for sewage discharges. Compliance with discharge consents is monitored by SEPA. As with drinking water, a serious failure to meet the standard set could result in the incident being referred to the Procurator Fiscal to consider whether to prosecute under environment protection legislation. There is no mechanism under the Sewerage (Scotland) Act to secure undertakings as to improvements. The threat of prosecution and fines is the only recourse open to SEPA. However, if Scottish Ministers are satisfied that a water authority has failed to do anything required by the Urban Wastewater Treatment Regulations (Scotland) 1994, they may make an Order under the Regulations directing the authority to remedy the default unless the authority has given an undertaking to take steps to secure compliance with the duty in question. In addition, it is planned to give SEPA powers to make enforcement orders on holders of discharge consents if it considers that they are contravening or are likely to contravene any condition of consent.

(iv) Effect of existing provisions

C18. The present legal and regulatory framework reflects earlier assumptions about the means by which water and sewerage services would be provided. As it stands, it does not make any clear allowance for potential new entrants, either in terms of using the authorities’ networks or in being held liable for failure to meet water quality standards. Indeed it is questionable whether it would be within the authorities' powers to strike the deals with third parties, whether for common carriage or some other means of allowing the latter to benefit from the authorities' networks, that would be necessary to allow competition in the fullest sense to develop.

(v) Social Inclusion

C19. The current framework for water charges is intended to ensure widespread availability of affordable services. Harmonised charging schemes in each water authority area ensure the affordability of rural water services, and the fact that domestic water charges are based on Council Tax bands goes some way in relating charges to ability to pay. In addition, a long-standing feature of the Scottish regime has been that domestic customers cannot have their water supply turned off for non-payment.

C20. The Scottish Executive is committed to these policies, and to ensuring that competition is introduced in a way that is consistent with their pursuit. This will mean preventing cherry picking, and ensuring that the costs involved in delivering them are shared across all customers, and do not fall exclusively on the authorities and their customers.

C21. The Executive is currently considering whether it is possible to improve on the protection that the current charging arrangements provide to many low-income households. The outcome of this work, which will be the subject of a separate consultation later in the year, may have implications for issues raised in this paper.

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