Managing Change in the Water Industry: A Consultation Paper

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G. THE ROLES OF THE WATER INDUSTRY COMMISSIONER AND THE DRINKING WATER QUALITY REGULATOR

The Water Industry Commissioner

G1. The Water Industry Commissioner is the economic and customer service regulator of the water authorities. He acts in the interests of all categories of the authorities' customers, domestic and non-domestic, but has no locus in respect of the customers of any other water undertakers. In practice, the present coverage of the water authorities means that the Commissioner and the regulatory regime cover most customers’ interests. However, were competition to develop in a way that led to a number of other undertakers becoming significant service providers, considerable numbers of customers would cease to be covered by the regime. The Executive believes that such a position would be untenable and proposes that the exiting legislation should be amended to extend the Commissioner's remit to cover the customers of all licensed undertakers.

G2. There are two further issues for consideration in relation to the role of the Commissioner: as possible administrator of the licensing regime and in terms of the 1998 Competition Act.

G3. As touched upon at F12, there are good practical grounds for giving the Commissioner responsibility for operating the licensing regime. Moreover, the Commissioner's general function is to promote the interests of water customers. The purpose of the licensing regime, particularly in seeking to protect public health, is consistent with that and setting up a separate licensing authority would run the risk of duplicating aspects of the Commissioner's work. As economic regulator of the authorities, the Commissioner is responsible for collecting and analysing much of the economic data relating to the sector that will be required in operating the licensing regime. Also, as customer service regulator, the Commissioner would be well placed to ensure that all operators in the market offered their services to customers in a transparent fashion and in a way that would allow the customer to make meaningful comparisons between competing services.

G4. The Executive recognises that the fact that drinking water quality and wastewater disposal regulation is not the responsibility of the Commissioner needs to be reflected in the arrangements for the regime. It proposes that the Commissioner should be subject to binding advice from the respective regulators, the Scottish Executive and SEPA, in awarding licences and subsequently monitoring compliance with the terms of the licences.

G5. Given the desirability of having a flexible licensing regime, the Executive believes that the legislation should simply provide for a broad framework. Ministers and the Commissioner could then develop and revise its detail in light of changing circumstances. When changes are judged necessary, these will be the subject of public consultation.

G6. As observed at D, the Commissioner currently has no powers in respect of the application or enforcement of the 1998 Competition Act. As a result application and enforcement the Act in respect of the water sector in Scotland rests with the DGFT alone. This is at odds with the position of the other utility sectors, where DGFT and the relevant regulator share jurisdiction under the Act, and where in the first instance the regulator takes the principal role in application and enforcement. The advantage of this arrangement is that much routine application and enforcement is the responsibility of those with the greatest knowledge of the sector in question.

G7. This approach, which gives the other regulators quasi-judicial powers under the 1998 Act, is possible given the nature of their statutory powers as regulators. These powers differ significantly from those of the Commissioner, reflecting the fact that the other regulators are responsible for privatised utilities, whereas the Commissioner deals with water authorities that remain in the public sector. A crucial difference is that unlike the other regulators, the Commissioner does not set revenue caps for water and sewerage in Scotland. Instead, it is Ministers, acting on the Commissioner's advice, who make this decision.

G8. In these circumstances, the Executive believes that for the Commissioner to have the same powers as the other regulators under the 1998 Act would be inappropriate. On the other hand, the current arrangement, where DGFT has sole jurisdiction is unsatisfactory in that there is no formal means of ensuring that DGFT takes into account the particular circumstances of the water sector in Scotland. To remedy this, the Executive has agreed with OFT that it will conclude a concordat with the Commissioner providing for him to be consulted in relation to all competition cases relating to the water and sewerage sector in Scotland. This arrangement will put the Commissioner on the same footing as those other regulators that do not have concurrent jurisdiction under the 1998 Act, as well as with the Scottish Executive itself, which also has a concordat with OFT covering competition cases generally where there is a Scottish interest. It will allow the Commissioner, drawing on his knowledge of the sector in Scotland, to advise the DGFT on matters relating to it in a given case.

Drinking water quality regulation

G9. Increased competition is expected to place an increased burden on the current arrangements for regulating drinking water quality.

G10. At present the regulatory function is carried out within the limited powers under the Water (Scotland) Act 1980. In circumstances where only the three public authorities were being regulated this arrangement was reasonable. The authorities as bodies accountable to Ministers, and ultimately under Ministers’ direction, were in practice open to inspection without the need for statutory sanctions. However, if a number of private firms, accountable to their shareholders, enter the market the position may change. They may be reluctant to agree access to regulators where the regulator has no statutory powers of inspection or access. To avoid such circumstances arising, particularly where a contamination incident may have occurred, the Executive sees a strong case for placing the regulatory function in a fuller statutory framework that sets out its powers and duties in respect of all operators.

G11. The enforcement powers currently available under the 1980 Act are also geared to regulation of the water authorities. They confer on Ministers the power to impose alternative managers on water and sewerage undertakers, but have no intermediate sanctions that might be deployed in the case of minor infringements. Such powers may be suitable to publicly owned authorities, where minor infringements can be handled without reference to statutory powers. However, in the case of a private operators a range of statutory sanctions may be necessary if the regulator is to be able to respond adequately to failings of different magnitude. A suitable model for revised powers would be those available to the Drinking Water Inspectorate in England and Wales under the Water Industry Act 1991.

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