Pathfinders to the Parliament

UTILITIES SECTOR PATHFINDER

Introduction

The utilities play a major role in the life of Scotland, providing a range of vital services to every household in the country. The utility companies in Scotland are a large industry in their own right. They make a significant contribution to the Scottish economy, with a number being leading players across the UK, and having the potential to become major international players. However, the potential of the sector is only just beginning to be realised and this report sets out how the utility sector can work in partnership with the Scottish Parliament to harness this potential for the benefit of Scotland.

The utilities sector provides every household in Scotland with a range of services and its reach is now quickly increasing to the rest of the UK and beyond. Three of Scotland's seven FTSE 100 companies are from the utility sector, and have a combined market capitalisation of £l6.4bn. A brief glance at some of the statistics for the industry demonstrates the significance of the utility sector to the Scottish economy both in the private sector and in the public water industry.

The utilities sector in Scotland:

Directly employs over 23,000 people in Scotland. Invested £1.2bn in Scotland in the last financial year. Has a combined annual turnover of nearly £9bn.

The investment of £1.2bn last year in Scotland demonstrates the commitment of the utilities in Scotland as well as their major economic contribution. The utility sector also contributes a significant amount to the community through charitable donations, sponsorship for community initiatives and support for education and training in Scotland.

We are delighted that Lord Macdonald, Scottish Industry Minister, has given us this opportunity, as a sector, to set out what we see as the challenges and opportunities facing the utility industry and the Scottish Parliament in the coming years.

The Scottish Parliament offers a number of opportunities for the utility sector and we believe that by working in partnership we can be one of the driving forces behind creating greater economic prosperity for Scotland. However, there will also be issues, which the Parliament must address to ensure that the utilities sector can develop its full potential.

The process

Ian Robinson, Chief Executive of ScottishPower, was asked to chair the group set up to bring the utilities views together. The utilities sector was defined by The Scottish Office as comprising power, gas and water services. The other members of the group were: Jim Brown (Director of Operations, East of Scotland Water), Ernest Chambers (Chief Executive, West of Scotland Water), Sue Clark (Director of Corporate Affairs, ScottishPower), Alastair Findlay (Chief Executive, North of Scotland Water), Jim Forbes (Chief Executive, Scottish and Southern Energy), Bob Frazer (Managing Director, Scottish Gas), and Peter Hollins (Chief Executive, British Energy).

The seniority of those on the group represents the seriousness with which this task has been undertaken. The group quickly reached consensus on the major issues, which are contained in this report.

Key issues for the Scottish Parliament

The report sets out the six top issues that the utility companies believe that the Scottish Parliament must recognise and address and lists recommendations for how this should be achieved. These issues are:

Scottish utilities are UK and future global leaders. Developing the partnership - the Scottish Utilities Forum. The social agenda. Long term legislative and regulatory stability. The role of public/private partnerships. The environment/planning

The subsequent sections detail the issues and finally set out the recommendations.

Scottish utilities are UK and future global leaders

A number of Scottish utility companies are at the leading edge of the world's best practice. With the unique experience of privatisation, deregulation, competition and convergence behind them, as well as having benchmarked against global companies, these utilities are UK leaders and well positioned to advance in global markets.

With the current proposed merger between ScottishPower and PacifiCorp, British Energy's recent joint venture with Peco to acquire nuclear plant in the US and the creation of Scottish & Southern Energy, Scotland is poised to become the centre of some of the world's leading global utilities. All three are major FTSE 100 companies headquartered in Scotland. The public water authorities in Scotland, whilst not seeking this kind of presence in international markets, share the potential to deliver world class levels of performance.

At a time of global economic instability, the utilities sector is one of the few sectors of the Scottish economy where it is possible to see long term growth and value creation. The utilities sector is one of Scotland's major job creators. In particular we have a strong track record in providing long term, quality jobs in Scotland. In addition to this the support we give to related industries and business in Scotland safeguards many more jobs.

The Scottish Parliament - supporting utilities

The continued success of the utilities industry can only be to the benefit of the whole of Scotland and there is no doubt that the Scottish Parliament has a role to play in facilitating this development. There will be many opportunities to further grow these Scottish based companies in the UK and overseas and this should have the strong support of the Scottish Parliament.

Access to the European Community's structural funds also has to be protected to assist in financing some of the investment needed to overcome remaining utility capacity constraints on industrial development. The Parliament should work with the utilities to secure this funding.

The Scottish Parliament will also need to ensure that the policies it follows do not damage the utilities sector in Scotland.

The utilities - promoting prosperity

There are a number of ways in which the utilities in Scotland can work in partnership with the Scottish Parliament and other businesses in Scotland to promote prosperity.

In particular, Scottish utilities have played a major role in helping to attract inward investment to Scotland. There is no doubt that the quality of infrastructure on offer to foreign companies is a major factor in deciding whether or not to locate in Scotland. We believe that the quality of service offered by Scottish utilities has played a major part in recent years in attracting major inward investors such as Chungwa and the expansion of NEC's operation in Scotland.

The Scottish Parliament and the utility sector should work closely to develop this partnership further. There is no doubt that the further establishment of the utility industry in Scotland as a world leader can only assist Locate in Scotland in attracting inward investment.

The utilities industry can also work with the Scottish Parliament to assist indigenous Scottish business. Utilities operating in Scotland already have very substantial customer bases outside of Scotland. We feel that there is potential for using our business interests outside of Scotland to help provide opportunities for other Scottish companies in the rest of the UK and beyond.

Recommendation: The Scottish Parliament should strongly support the utilities in Scotland in consolidating their position as UK and future global leaders.

Developing the partnership - the Scottish Utilities Forum

If a partnership capable of producing meaningful results is to be developed with the Scottish Parliament. it is important that a mechanism is developed to achieve this. The setting up of a Scottish Utilities Forum, could be the ideal way to take this forward.

The remit of such a body would be to allow the utilities industry to address issues affecting the sector with members of the Scottish Parliament and also to identify opportunities for the utilities sector to support economic development and the wider Scottish community.

We envisage that the Scottish Utilities Forum would principally be comprised of senior directors and executives from the utilities operating in Scotland, the relevant Scottish Executive Minister, a cross party group of Members of the Scottish Parliament and relevant Government officials. We propose to institute the Scottish Utilities Forum by the autumn of 1999.

There is a widely held desire that the Scottish Parliament breaks away from adversarial politics and in particular that Committees of the Parliament are able to operate in a consensual and positive manner. We believe that a Scottish Utilities Forum could provide an effective mechanism by which the utilities sector could provide a positive input to relevant Committees of the Scottish Parliament, which will involve all parties. We also believe that the Scottish Utilities Forum could have a role in fostering good relations between the Scottish Parliament, Westminster and the European Parliament.

Another role the Scottish Utilities Forum could play is to provide a formal channel between the Parliament and the sector to increase understanding between politicians and business. It would enable politicians to increase their understanding of the utility industry and for utilities to maintain a good grasp of, and responsiveness to, the concerns of politicians.

In particular, as many MSPs will not come from a private sector background we believe that it would be beneficial to provide them with a better understanding of the environment within which we operate. Therefore the Forum could provide the type of interface between politicians and companies that the Industry and Parliament Trust currently provides at Westminster.

The utility companies have developed their businesses in Scotland with a strong focus on efficiency and customer service. Benchmarking has been used by a number of these companies to both calibrate their performance and make further improvements. Significant investments have been made, particularly in the customer service area. These companies are positioned strongly in both UK and global league tables in these important subjects. It is the intention of the utility companies to continue to develop and improve customer service in Scotland.

We firmly believe that a Scottish Utilities Forum would add real value to the relationship between business and the Scottish Parliament. We will put this proposal to the Scottish Parliament in May and hope that they will respond positively.

Recommendation: That a Scottish Utilities Forum be established with the full participation of the Scottish Parliament. This Forum will act as a mechanism principally for addressing major utility issues (such as customer service, investment, environment, growth opportunities) in Scotland and should be established by the Autumn of 1999.

The social agenda

As a sector that operates in every community in Scotland the utilities already make a very significant contribution to working with those communities in a number of different ways.

As many of the main powers of the Scottish Parliament will centre around social policy we are keen to ensure that the Parliament understands the commitment we already have in certain areas and we intend to work with the Parliament to see how we can develop these further.

Encouraging enterprise and educational excellence will be vital for Scotland's future prosperity. In particular, the utilities have shown a great commitment to developing education and training opportunities for the people of Scotland.

ScottishPower, for example, through ScottishPower Learning has shown not only its commitment to the New Deal in Scotland but also that creative thinking, partnerships with other agencies and the use of available resources can open up a whole range of learning opportunities to a wide cross-section of the community.

However, there is room for this to be developed further. We envisage that our approach to education and training would be two fold. Principally we wish to work with the Scottish Parliament to examine how the considerable resources both in human terms and physical assets, which are at the disposal of the Scottish utilities, can be utilised to the benefit of the community.

As a sector there are a number of areas of development involving higher level education. For example, British Energy is supporting projects linked to Scottish universities including the newly established Scottish Energy Systems Group and the establishment of both the Scottish energy laboratory and the Scottish Energy Institute. Secondly, we believe that the utilities sector and business in general will have a role to play in developing an education system that encourages enterprise and equips people with the skills business requires.

We also believe that the utilities sector and the Scottish Parliament will be able to work together to assist social services in improving the position of disadvantaged customers. In particular we are sure that the Scottish Parliament will wish to examine what role it can play in the fuel poverty issue and ensuring that less well off customers are not left behind as energy markets open up to competition.

The utilities are already examining ways of helping disadvantaged customers and tackling fuel poverty. A good example of this is the support Scottish Gas gives to SCARF (Save Cash and Reduce Fuel) which has expanded from its Grampian base to cover Dundee, Perthshire and Tayside. Their support has helped SCARF to increase substantially its advice activities, and the number of insulation projects that it has been able to undertake.

Recommendation: The utilities sector will seek opportunities with the Scottish Parliament to make creative use of utility companies' resources to support education, training and community programmes throughout Scotland.

Long term legislative and regulatory stability

While the Scottish Parliament will offer the opportunity for a positive partnership in a number of areas we do foresee a number of threats which could have a damaging impact on the utilities sector in Scotland.

In particular we feel it is vital that the Scottish Parliament recognises that all of the utilities in Scotland plan on a long term basis and are making substantial investments that are based on 15/20-year time spans.

As such we feel that when considering legislation which may have an impact on utilities in Scotland, this should be taken into account and that similar long term thinking is applied.

There is also a range of unique issues facing the utilities in Scotland. For example the structure of the electricity industry in England and Wales is different from that in Scotland. Given this there are issues specific to Scotland, such as the different Scottish trading arrangements, the interconnectors to Northern Ireland and England & Wales and the Nuclear Energy Agreement, which runs to 2005.

With particular regard to the water industry, the Scottish Parliament should expedite the appointment of the Water Commissioner proposed by the Water Bill. This Commissioner should be required to introduce a regulatory framework which encourages the adoption of a long term horizon on a five-year basis.

It is vital that these unique issues are understood by the Parliament. The Scottish Parliament will have a role in ensuring that specific Scottish circumstances are understood at all levels. In particular we believe that the Scottish Parliament should use its powers to question the utility regulators to achieve this.

Business provided a strong argument for legislation that safeguarded the level playing field for business throughout the UK. However, we are still concerned that the Scottish Parliament may decide to return business rates to local authority control, as it will have the power to do.

We are concerned that local authorities struggling to keep council taxes down while maintaining service levels will use business rates as an additional source of revenue. The utilities in Scotland in particular are holders of large assets and increases in business rates could lead to a very heavy additional burden on our businesses.

Recommendation: The Scottish Parliament must recognise and support the unique issues facing the utilities in Scotland. It must also ensure that a level playing field for Scottish business is maintained.

The role of public/private partnerships

The issue of capital spending on public infrastructure has been a much debated topic of late. We believe that the Scottish Parliament should take positive steps to ensure that resources are available to fund investment in much needed public infrastructure.

We believe that the utilities sector has a real role to play in working with the Scottish Parliament to come up with creative projects which use private capital, both to build new public infrastructure and refurbish existing infrastructure, which will benefit the whole community while providing value for money for the taxpayer.

The partnerships, which the Scottish water authorities have developed, are cost-effective examples of projects that will provide important improvements in the environment.

The North of Scotland Water Authority has taken the lead in developing public/private partnerships within the utilities sector. The first wastewater treatment plant in the country built using this mechanism has recently come on line in Fort William.

Scottish and Southern Energy has led the energy sector in PFI with NHS Trusts in Scotland at Dundee's Ninewells and Edinburgh's Western General Hospital.

Recommendation: The Scottish Parliament should take a positive role in developing creative forms of public/private partnerships and work with the utilities industry to generate public/private partnerships, which will benefit Scotland.

The environment/planning

Environment policy is one of the areas over which the Scottish Parliament will have control. The utilities in Scotland have invested billions of pounds in improvements that will protect Scotland's environment. It is therefore an area of policy, which has a direct impact on all of the utilities in Scotland.

Although the Parliament has responsibility for environment policy this is mostly under the direction of the European Union and we foresee the Scottish Parliament's main powers in this area being decisions over how European legislation is interpreted and implemented.

While we expect the Parliament to implement policy in such a way that protects and enhances Scotland's unique natural environment we are concerned that the Parliament does this in a way that balances the needs of customers against increased prices. The Parliament should also recognise any possible adverse impact on the utilities in Scotland who have a strong track record in minimising the impact on the environment from their activities.

On environmental legislation the Scottish Parliament will have an important role to play in advocating Scotland's position at a European level to ensure that environment policy from Europe does not unnecessarily harm Scottish business. It will also be important that the Parliament and in particular Scottish Ministers ensure Scottish circumstances are represented in the UK's negotiating position in Europe on environmental matters.

The Scottish Parliament will also have responsibility for energy efficiency. Again the utilities in Scotland have already demonstrated their commitment in this area and we look forward to working with the Parliament to see how the energy efficiency agenda can be taken forward.

Finally, planning is another important area over which the Parliament will have responsibility. The community planning initiative is one important means of keeping all the providers of services to the community in touch with the aspirations and concerns of local people. Utilities have been actively involved in this initiative working with local government and others, and look forward to the further development of this initiative.

With specific reference to land use planning we believe that the Scottish Parliament has a real opportunity to look at planning legislation in Scotland to see how this could be changed to encourage further the development of jobs in a growing Scottish economy.

Recommendation : The Scottish Parliament should be encouraged to maintain the right balance between protecting Scotland's environment and creating employment opportunities within Scotland.

Summary of Recommendations

The Scottish Parliament should strongly support the utilities in Scotland in consolidating their positions as UK and future global leaders. That a Scottish Utilities Forum be established with the full participation of the Scottish Parliament. This Forum will act as a mechanism principally for addressing major utility issues (such as customer service, investment, environment, growth opportunities) in Scotland and will be established by the Autumn of 1999. The utilities sector will seek opportunities with the Scottish Parliament to make creative use of utility companies' resources to support education, training and community programmes throughout Scotland. The Scottish Parliament must recognise and support the unique issues facing the utilities in Scotland. It must also ensure that a level playing field for Scottish business is maintained. The Scottish Parliament should take a positive role in developing creative forms of public/private partnerships and work with the utilities industry to generate public/private partnerships, which will benefit Scotland. The Scottish Parliament should be encouraged to maintain the right balance between protecting Scotland's environment and creating employment opportunities within Scotland.