Future Flood and Water Management Legislation

Memorandum submitted by SSE Water Ltd (FFW 13)

Summary

1. SSE has been involved in developing a competitive route into the water industry in England and Wales within the existing legislative framework. An increasing number of barriers have become evident to us, including the approach and process of the industry regulator Ofwat.

2. Our submission addresses the first area mentioned in the Committee’s call for evidence: SSE considers that government action is required to improve the climate for the development of competition in the water market. A number of short and medium term legislative priorities are identified.

Submission on first area raised in the Call for Evidence

Which of the key issues covered by the consultation into the draft Flood and Water Management Bill and by the Walker and Cave reviews should be taken forward as legislative priorities?

Introduction

3. Competition is generally recognised as providing a number of benefits to customers as a whole. The prospective benefits for the water industry in England and Wales of greater competition and innovation were confirmed in the Cave Review.

4. SSE Water (SSEW) – a wholly owned subsidiary of SSE – has been at the forefront of developing the only existing viable route to providing competition in the water industry in England and Wales – the "new appointment" process, whereby Ofwat can grant a licence to a new company to provide water and/or sewerage services for a greenfield site within an existing water company’s area. This provides developers of such sites with a choice for the provision of new water and sewerage infrastructure: they can ask the local "incumbent" water company or they can do business with a new water company such as SSEW. In the latter case, SSEW then supplies water and/or sewerage services to the newly built premises within the development on the same basis (or better) as incumbent water companies currently serve existing premises in their geographic areas.

5. While the provision for new appointments has been part of water legislation for a number of years, SSEW was the first company to seek to use this route to become appointed as a new entrant into the water industry. We have worked with Ofwat to develop the processes around establishing new appointees and, since SSEW’s initial appointment in 2007, have been awarded appointments for only 6 additional developments, each assessed by Ofwat on a site-by-site basis. It has to be noted that this process has been time consuming and resource intensive – our perception is that it is becoming more difficult to obtain new appointments rather than the process becoming easier over time, as we would have expected.

Proposed Legislative Priorities

6. Our key requirements in order for competition to be effective are as follows:

§ A single licence for provision of network infrastructure, proportionate to the size of the company, rather than the need for site-by-site application to Ofwat;

§ Incumbent water companies should publish charges for services needed by new appointees and be under regulatory obligations to provide terms in set timescales; and

§ There should be a standard industry framework agreement or code to cover commercial aspects of the services needed by new appointees to avoid negotiation of multiple bilateral agreements.

7. Our perception is that Ofwat has the powers to promote most of these requirements in order to streamline the current competitive framework, although they seem reluctant to do so. To the extent that Ofwat will not or can not act within the current legislative framework, we believe that legislation is needed and that an overhaul of the framework for competition in the water industry should be a legislative priority.

8. For the short term, we propose two amendments to existing water industry legislation to remove barriers and establish a more level playing field between new appointees and existing incumbent water companies.

9. The first of these concerns the sections of the Water Industry Act 1991 that deal with the duty on water undertakers to provide a water main, through a process known as requisitioning. Due to a technicality of wording in the Act setting out who can requisition a main, we find that SSEW is being offered terms for connection works required to meet the needs of a developer customer inferior to those that the developer could obtain if he approached the incumbent water company, as its customer, to requisition the main. The same situation pertains for provision of a public sewer. This clearly has a detrimental effect on competition and we believe it would be easily remedied by a small change to the Act. We have a proposal for drafting on this point if the Committee would like further detail.

10. The second amendment concerns the legal definition of a greenfield site. Known as the "unserved criterion", our experience suggests that this test of whether a developer can seek to use a new appointee is unnecessarily complicated and has been used as a barrier. It should be removed and again, we have drafting for an alternative criteria based on the consent of the developer.

11. In the medium term, we would urge the government to address the requirements for a more effective competitive market framework that we have highlighted in paragraph 6 above. We are aware that there is a focus on supply competition but we believe that the form of competition that has recently emerged through the new appointment process should also be supported by government. Contestability of infrastructure provision also brings competitive pressures for service and innovation and can readily co-exist with competition in supply, as is the case in the energy markets.

12. SSE has provided ideas for the possible content of national water network licences to a previous government consultation and to Ofwat to address the first requirement we have noted above. We would certainly like to see a more active role played by Ofwat to secure appropriate behaviour by incumbent water companies in the meantime.

October 2010