Environment, Food and Rural Affairs CommitteeWritten evidence submitted by SSE Water Ltd

About SSE Water

1. SSE Water Ltd (SSEW)—a wholly owned subsidiary of SSE—is one of the largest new entrants in the water market. It installs, owns and operates water infrastructure and has been appointed to supply water and/or sewerage services to over 14,000 new properties across England and Wales. It is actively involved in, and at the forefront of, the developing competitive framework in the water industry.

In autumn 2007 SSEW was appointed as the water provider to a new housing development and became the first new water and sewerage service provider in England and Wales since the privatisation of the industry. Since then SSEW has been seeking to develop its business by pursuing further inset appointments for new developments in England and Wales. Inset appointments of this kind are the only existing viable route to providing competition in the market.

Summary

2. SSEW has experienced a number of barriers to date in pursuing the development of its water business and therefore welcomes the intent signalled in the White Paper to extend competition in the water sector and improve the competitive processes already available.

3. Also detailed in this submission are additional legislative changes which SSEW believes would significantly remove barriers to new entrants in the current framework for inset competition. More information can be provided at the Committee’s request.

Does the White Paper set out the right principles for customers and the water and sewerage industry for taking forward reform of the market for water supply?

4. SSEW welcomes the proposals in the White Paper on reforms for the inset framework. The commitment to introduce a framework of transparent market codes to determine the rights and responsibilities of all market participants in relevant market processes and to establish a transparent wholesale access pricing regime should be particularly helpful. SSEW agrees that Ofwat should have the powers and duty to establish these rather than having market details such as “the costs principle” set out in primary legislation, which is inflexible and can, as noted in the White Paper, actually act as barriers to competition.

5. SSEW also supports the intention to introduce “network” licences and to allow standardisation of existing water industry licences and more streamlined modification of these, in the manner that has become established in the energy sector. These measures should allow for adaptable licences tailored to the specific activities and size of market participants, which should align to the development of market codes and wholesale pricing, thus aiding the process of orderly market development.

6. SSEW also welcomes the extension of retail competition for business customers but hopes that effort to revive this currently dormant form of competition will not delay the changes required to assist the inset framework, which is actively being used by SSEW and others. The reduction in the competitive threshold in England to 5Ml of annual water use brings an estimated 26,000 premises into the competitive market but it is worth noting that, in Scotland, where around 130,000 business premises can choose their water and/or sewerage supplier, there are still not many new entrants. Evidence of business customers being willing to switch away from incumbent suppliers would be helpful in encouraging new entrants but it is unlikely that a very active retail water market will exist until the non-household competitive threshold is reduced to zero—set out as a future intention in the White Paper.

7. While the market and licence reform measures discussed above are necessary to help competition from insets (and in retail supply of services to business customers) to thrive, they will not be sufficient to ensure the success of these competitive frameworks. There needs to be a change in culture within the incumbent water companies that recognises the need to deal on a fair and non-discriminatory basis with companies who are competitors in downstream activities. With no requirement for legal separation of competitive from natural monopoly elements of the water and sewerage services supply chain, this culture may be more difficult to promote. SSEW agrees that monitoring and active regulation by Ofwat will be important in achieving the reforms’ objectives in terms of:

appearance and growth of new entrant businesses;

effective choice being available to developers and business customers; and

choice being exercised by developers and customers in order to reward efficient, customer-focussed and innovative service offerings.

Does the White Paper omit any key issues where further policy action is required to ensure sustainable, reliable and cost-effective water supplies?

8. While the White Paper sets out useful proposals, it is unfortunate that there is no consideration of legislative amendments which SSEW has previously proposed to remove barriers to entry and establish a more level playing field between new inset appointees and existing incumbents. Summarised below are two pro-competitive amendments that would allow the current inset framework to function better. To further create a competitive water market SSEW would urge that these proposals be recognised and fast-tracked. SSEW does not think it fair that current restrictions on incumbent companies be lifted (such as the in-area trading ban) before barriers affecting new entrants have been addressed and the new market codes and pricing arrangements successfully bedded in.

9. The first amendment 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, 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. SSEW has 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” for granting an inset, our experience suggests that this test of whether a developer can seek to use an inset appointee is unnecessarily complicated and has been used as a barrier. It should be removed and SSEW has pre-prepared drafting for an alternative criterion based on the consent of the developer.

20 January 2012

Prepared 4th July 2012