 Welcome to the 29th meeting in 2014 of the Infrastructure and Capital Investment Committee. Everyone present is reminded to switch off mobile phones as they do affect the broadcasting system, although some committee members may consult tablets during the meeting as meeting papers are provided in digital format. We have received apologies from James Donan, who will not be joining us this morning. The only item on the agenda today is to hear evidence from representatives of Scottish Water focusing on Scottish Water's performance over the 12 months covered in their annual report and accounts for 2013-14, as well as a look ahead to the 2015-21 regulatory period. Can I welcome Ronnie Mercer, chair Douglas Millican, chief executive Peter Farer, chief operating officer and Johanna Dow, business stream chief executive of Scottish Water? Can I invite Mr Mercer to make an opening statement? Thank you, convener, for inviting us along to give evidence today. We had another quite strong year, and the one that you've just said, the continued investment in Scotland's water and wastewater infrastructure. In the year that we're talking about, we recorded our best of our drinking quality and environmental performance. We got record levels of customer satisfaction that year, and the bill average household charge was held to £54 lower than the average bill in England and Wales. We also introduced a customer awareness campaign to help prevent what we call costly blockages in the sewer network. It's not always pretty to watch what we're putting out, but it is to try and get people to help us to not spend a lot of money cleaning these things up. We're also delighted that the First Minister, Nicola Sturgeon, officially opened a new premises at the bridge in Steps in Glasgow. It's not only an investment in staff, but it's an investment in customers, and it houses our intelligent control centre, which uses telemetry to drive the business forward. That enables us to be a bit more predictive, a bit more proactive in our day-to-day issues. Technology helped to play a positive role this year when we had peak demand in local areas such as the Commonwealth Games and the Rider Cup, for example. We also had some challenges during the year. Everything doesn't go perfectly well. We had some large water main burst in Glasgow. That affected our service to customers. Hopefully we recovered them, though, quite quickly. They weren't related incidents. Anyway, looking forward, I'm delighted to say that, since we last appeared before the committee a year ago, we've reached a final agreement with our regulator on prices and priorities for the time 2015 to 2021, and that's come after extensive engagement with customers. One of their top priorities is stable prices, that was the thing they said. I'm delighted to say that we've committed to delivering this. We've agreed that for four years the price will be pegged at 1.6 per annum. The following over 10 per cent the price is in real terms between 2010 and 2015, so this period has been quite successful at managing that. Other key priorities that they've told us we need to do is continued water and wastewater improvements. They want that. Building resilience in the network and security of supply is also a key for us. That's quite a big issue. We don't know a record of many droughts and things, but we need to build more resilience in and we'll probably answer things in that today. We'd like to reduce again the number of homes at risk of internals so we're flooding to next to nothing. Our investment periods see us planning and evaluating operations more strategically over the longer term. I've kind of noticed in my time here a maturing asset management journey that I was looking back on it before we came. It's kind of from compliance driven to sustainable performance, if you like, in the past. It's from tactical investment to real strategy led investment. It's from reactive to long-term risk-based predictive outcomes. Everything moves on in life, and that's one of the things that's moved on. It's moved on for the better, in my opinion. We'll be investing about £500 million a year. We'll be meeting new growth demand. We'll support the economy, the employment. We create job opportunities for young people. We've currently got 78 apprentices and 33 graduates. And then we encourage, I use the word in inverted commas, our supply chain to have graduates and apprentices as well. And there's a lot more there too. And some of that new talent we have will be working in big projects that we've got planned. For example, there's £100 million for a Glasgow waste water tunnel to improve river Clyde and to reduce flooding in Mount Florida and Giffnock. So we'll have some of these young people, graduates and apprentices working in that. I just want to mention briefly, Scottish Water has worked with Water Raid, Big Charity in Africa and Asia, helping to provide safe drinking water and better sanitation. We've got a big relationship with them and support the activities all over the place. And Peter here has been to Zambia to see some of the work we're supporting there. Just a few words in business stream, computer, just for a minute. Business stream is a retail arm. Joe is the Interim Chief Executive. Seen increased customer satisfaction to in its six years of existence, delivering benefits such as discounts, savings and particularly energy efficiency savings in water saved. We think 20 billion litres. We've got an engineering solutions group who go to customers and help them to... It's ironic to help them to get their bill down, but I mean that's the idea, is to help them to be more efficient. During the last year, business stream had a successful partnership with the public and third sectors in Scotland extended for 12 more months. It ends in March 2015. And that again added exceptional value for public sector customers with quite big savings made for them. However, the fact is that Scotland's retail market has been open to competition since 2008. England doesn't open until 2017. So competitors have mobilised in Scotland ahead of England opening and there are now 17 competitors for business stream in the Scottish market. Two years ago there would have been about three or four. Now 17. These people are here. They're competing in Scotland. They don't actually compete with each other in England yet because it isn't open. So business stream's objective is to hang in there until England opens in 2017 when it might regain some market share. So I just put this little warning if I had to do before. Some questions if they're commercially sensitive, Joe would need to answer them afterwards outside because this is filmed in competitors. Oh, 17 there might be watching. And we want to give them any advantage of what we said. So if you just bear with me, that will tell you what you want to know. So that's a brief update, convener, on our activities since we last appeared and we're delighted to answer any questions you have on any part of the business. Thank you very much, Mr Mercer. We're going to crack on with some questions from Adam Ingram who's going to ask about water and sewage charges and Scottish Water International. Okay, thank you, convener. And good morning, everyone. I notice, Mr Mercer, you'd mentioned previous sessions or meetings in this Parliament. And in the last couple of years, I think it's true to say that you were proud to announce the lowest water charges in the UK. But that situation has changed a little. Can you perhaps explain why we're no longer the lowest in terms of water charges in the UK? I'll get the detailed explanation from Mr Milliken, but effective we drive ourselves to be among the lowest bills in the country, the UK, and the highest customer service. At any given moment, you may not actually be in that pole position but close to it. I wouldn't want to have any incorrect decisions to just do that, but we have a huge objective of being amongst that level. Douglas, would you like to elaborate on that? Thank you. Maybe three parts to that. Firstly, in terms of what's happened over the last two or three years, is that there was one of the water companies in England whose charges were very similar to ours but were required by the regulator to have quite significant below inflation price adjustments that brought them slightly below ours. But if you look at our relative position compared to England as a whole, throughout the last few years, our average charts in Scotland have been consistently around £54 a year below the average in England and Wales. I think the second thing I'd say is I'm looking really to the future. We've been very much guided by what do our customers want, so we did a huge amount of customer research and customer engagement in setting the plans and priorities for the 2015 to 21 period. And there were three things that came out loud and clear from customers there. Firstly, they did not want us to go back on any aspect of service or performance. Secondly, they wanted us to improve service in certain particular areas but all subject to prices rising but rising by less than inflation. And if you like, what we've done in setting our plans and priorities for the next few years is try to respond to what customers want and therefore where prices will go in the next few years is to reflect what customers are looking for in the balance between prices and service priorities. And I think we can be fairly confident now that the English price determinations are out for the next five years. But our competitive pricing proposition will carry on through to 2020 where average charges in Scotland will continue to be at least 50 pounds a year below the average in England and Wales. And could you tell me why that is, why you're able to hold your charges down below the average in England and Wales? I think there's a number of different factors that go into what the relative charge levels are of different companies. Geography plays a part and in that sense, geography can place an upward cost pressure on us because we're covering a third of the UK land mass. But there's some favourable factors that are going for us. I think the public ownership that we have absolutely works in our favour because we get access to low cost of finance relative to the private companies. The system that we have for billing and collecting household charges is a very efficient system whereby the charging is done in conjunction with local authorities so it's one bill covering council tax and water charges. That in itself gives a big saving to customers. And then the third dimension is the work that we've done and will continue to do to drive efficiency and innovation into how we deliver services. And the relentless drive that we have with our people is that our customers should not pay a pound more than they need to for the vital services they depend on and we've really used that to engage our people to drive further into future service. Thank you for that answer. It's interesting that the first point you mentioned was public ownership and the fact that a public body can outperform the private sector I think is encouraging. Perhaps a pointer to other services in the future. The fact is that the regulator in England has looked up here and said that's a pretty good working model they've got there and he's trying to prevent the dividend flow leaving the UK from some of the ones down south but there we are. We've really tried to make that work for us and I think particularly in the whole way that we engage our people in the challenge it really inspired and encouraged them that all the benefits of delivering flow back to customers whether that's an enhanced service or greater efficiency because it all flows back to more affordable charges for our customers. Thank you very much. Could I move on to one of your subsidiaries if that's the right expression Scottish Water International you've made some play of that in previous sessions we've had as well and I noticed that Scottish Water International posted a loss of some £200,000 before tax on revenue of £1.2 million in 2013-14 Could I ask what the loss was after tax as this isn't set out in the annual reports? I mean it'll be down in the roundings but it'll be slightly less than that because you've got to affect the tax credit back but maybe if we can just place that into a broader context international we set up about three years ago and we've been very much investing in the growth and development of that business and also learning what works and where's the demand for our services and where we've now really landed is that if you like the unique proposition that we offer is how do we help other publicly owned water companies or water authorities become efficient and become commercially successful while in public ownership and if you like that's kind of the unique proposition that we have and one of our aims was to try and get to position where we have what we term base load contracts three contracts where we might be involved in territories on a multi-year basis. When we met the committee a year ago at that stage we just had one contract in Qatar but I was hopeful at a time that there was a second in the offing and I'm delighted to advise the committee that we now have three of these base load contracts so we're continuing to work in Qatar we're working in the Republic of Ireland supporting the setup of Irish Water which again is an organisation in public ownership but needing to deliver significant efficiencies and commercial change and we're also working in City of Calgary helping them as they transform the efficiency of their water services if you like that's kind of the foundation of the business various other contracts on top of that and while it's too early to predict precisely how the results will be this year I'm pretty hopeful and we'll post a financial report for this current year and in terms of developing the business do you see how do you see that happening going forward? I think what we've recognised is that in terms of if you like this target market which is other public loan businesses looking for real expertise there's two types of skill that we can sell into and deploy in that area the most significant value is where we take senior people in Scottish Water who really have got the experience of the transformation and may go out literally for short as a week or two weeks of time but the insights and experience that they share can be really value adding for other public authorities and then the second dimension is where we've got very experienced members of staff in our more middle levels of management and technical expertise where we might have people who go out for a number of months from the case of Qatar for a number of years so to give you a sense over the past year we've had 68 employees working on assignments that's ranging from people who are full-time in Qatar for many years through to those who are maybe out for a couple of weeks so it's a make sure it's consultancy and it's technical it's very much advisory and consultancy looking at where we can bring the skills and expertise to bear to help other public bodies but there's also a direct benefit back into Scottish Water because it gives really good development opportunities for our staff about working different cultures and different commercial contexts so what we're trying to create here is a win-win of where we deliver benefits to clients and we're getting development value Adam, it's true to say we're not going to build on and operate anything anywhere else this is about expertise in people we're not, if you like, risking our customer money in that way that's not what it's about definitely not what we're doing it's more just people and expertise not digging holes in You've mentioned Ronnie that Peter had been out in Malawi was that as part of... It was Water Raid he was out there for just to elaborate on Douglas the Republic of Ireland people phoned me last week to chat about what they're trying to do because the model for them is kind of Scotland or Wales not England it's an interesting model people quite like this model and they're going to be owned by the Government anyway so it is an interesting model that you can sell your expertise from I think it's a good thing to do and it makes you slightly more to join if you think you can go and do things like that it's just going to use the word sexy there but you know I can get a wee bit of can I glitter about it that you might go a student might think I could go abroad and work for a bit, it's interesting okay well thank you very much Mr Farrow did you want to come in? No I thought you were championed a bit to come in Alex you put some questions on thank you very much we'll start with noting that Scottish Water Risons have turned around in the 12 months to the reports that we've got now and reported a profit of £700,000 before tax relating that back to the previous question that Adam asked how much tax did you pay on that 700,000 perhaps the right thing to ask is how's tax and profit treated within the company do you pool your profits or losses together before tax is calculated? Scottish Water is subject to corporation tax and the position of Scottish Water as a whole is that we have not in terms of our main activities we've never yet been in a tax paying position that is absolutely to the benefit of our customers and that reflects the fact that we get capital ounces on new investment and new infrastructure that we put into the ground so that although something might appear as an accounting profit from a tax angle it's not a taxable profit to the extent that we can then we may utilise that to benefit other parts of the group but absolutely fully complied but it would be fair to say that a profit within one part of the group will ultimately be set against losses in other parts or tax we will optimise our tax position across the group but it is absolutely to the benefit of our customers because it's customers who get the benefit of that through lower bills than would otherwise be the case looking at what you've done with Scottish Water horizons can you provide an overview of the strategic review that took place in the contents of the business recovery plan? We've undertaken quite a review as to the key areas of focus for horizons and that will continue to be a situation that we keep under development as we see how the economy and the market recovers but if I look at the key activities within horizons there are probably two principal activities the first of which is in the developer arena as to how we support developers who are wanting to get for example studies done or how they can connect into the infrastructure or perhaps where they need to lay infrastructure of their own to connect into the system and the Scottish Water horizons provides a market competitive service into that arena and to give you a sense we've nearly 5 million worth of turnover in the last year the other major area of activity is in the waste management space and that itself falls into two categories the first of which is that we have a food waste recycling plant at Cumbernauld where we took an old disused wastewater treatment plant and turned that into a facility that takes food waste from across the central belt and disposes that but in a way that creates energy as a by-product of that process but the other aspect of waste management is that we take waste particularly liquid waste in to our whole range of wastewater treatment plants around the country so effectively what we're doing we're taking a tankered waste in and then bleeding that in to the wastewater treatment plants to an extent and a manner that that can be done fully in compliance with the licenses from CEPR for the operation of those plants so that can range and at the moment we're doing a lot of work up in the Shetland Islands in the back of the growth that's taking place at Sullamvo there about taking waste of site and then bleeding that in to our waste treatment plants so that's a good example of a market-led opportunity we weren't doing that a couple of years ago and that's now providing a material income stream in the current year As you point out there are commercial operators working in the sectors that are covered by Scottish Water Horizons do you feel it's appropriate for you to new in these activities when there are a number of private companies out there competing for that business already? I think this is a case of us providing an opportunity against some key conditions firstly it's got to be an opportunity that is absolutely consistent with us running our core wastewater activities secondly it's got to be something that is absolutely profit enhancing in other words it's giving clear value and therefore customers because of that and then the third dimension that is very important is that there is no cross-subsea going on in the activities and therefore it is a fully costed service that we are competing against at the private sector on Thank you. The other area I wanted to ask you about is one that's been touched on by Ronnie Mercer already and it's business stream so I'm going to ask the questions anyway if you tell me it's commercially sensitive then However, the Andrew report highlights that growing competition in the non-domestic market what impact is this having on Scottish water and business stream? We knew that we would eventually get competition and we don't mind that as long as it's kind of universal across the UK eventually but there's a bit of a time lag business streams are on since 2008 market's been open since then and it's two years to England there's a two in a bit so our market share is being eroded by the people in Scotland who are kind of tuning up for England opening I think as well there's a wee bit of when we take a licence and see what goes on so and maybe I'll ask Joe to elaborate wee bit in just how life has changed in the last year or so because it is quite dramatic I have to say we spend a lot more time on it so Joe you want to? I think when the market opened initially in 2008 we fully expected that we would lose customers you know the whole point of a competitive market is to drive advantage for customers and a natural consequence of that is switching so customers would choose to move to a different service provider or indeed stay with business stream if they felt that they could get that enhanced level of service that they were looking for so switching in the market was incredibly slow in the first few years of competition but what I would say is most definitely in the last 12 months we've seen a step change in that so as Ronnie mentioned earlier we now have 17 competitors in the market many of whom are active most of those competitors are English water companies as well so they're very much kind of using the fact that the market in England isn't fully open to competition the market in Scotland is and they're kind of coming to Scotland and testing their wares and just seeing how the market works and getting experience of that I would say that yes most definitely we're kind of living with that on a daily basis I see that as an opportunity though you know we always expected that we would that there would be a level of churn in the market that's actually what the market's there for so for us it's a positive thing as Ronnie says the big challenge for us just now is that there is that unlevel playing field in that we can lose customers in Scotland but we can't at the moment win back equal sized customers in the English market so that's most definitely a source of frustration and we look forward to a level playing field in two years time to ask what is the nature of the switching that has taken place is there a churn in the market or is it a few big customers making big savings by switching I think until maybe six months ago the switching that we saw was definitely more at the larger end of the market so it was your larger customers and typically because they were commercially savvy if I'm honest so they knew the market existed we differentiate our customers segment them and what we found previous to the last six months is that the smaller customers so we would categorise them as SMEs there wasn't a huge amount of switching in that particular area of the market that has changed as well in the last six months so we've seen a couple of niche players come into the market who solely target those SME customers and again I think that's a good thing because you really want all customers in the market from competition You touched a second ago on the quid pro quo of having the market open when that English market will open up in another two and a bit years time what are you doing to prepare yourselves for that and do you see it as an opportunity We would like to think that the one thing we do have is we've got more scars gathered already because we've been in competition for a while so we would have a kind of first mover advantage and that's why to some degree Joe's describing that there's more activity in the last year because it's become obvious that the bill was passed in England and it's going to open so it's real it's going to happen and we have been preparing for that and we are preparing for that because ultimately the market share we record will only be the market share of the whole UK minus Wales who are not in this but not the market share in Scotland and that will be what counts so we have got a targeted strategy for that I'm not going to tell you where it is on camera but I'll tell you after if you want and that's very very we've got people who do nothing but that and yes you switch them off or go for it but I'm not going to tell the people watching what we're doing but we have an absolutely targeted strategy for that Joe has that in our business but it's quite a long hang on I have to say it's quite a while to wait because it's fully legally separated so we're carrying all the costs at the moment so we just have to live with that I can see how it's a big opportunity and I can see the potential for substantial success but with that opportunity comes risk can you tell me how Scottish domestic customers will be protected from any risk that you might take to succeed in that marketplace let me take that firstly if I just reference back a point that Ronnie just made a minute ago business stream is completely separate from Scottish water so it is legally and financially separate so all the activities of business stream need to stand or fall within the financial resources available to it we there is no mechanism for cross subsidy between Scottish water, the regulated business that supplies household customers and that of business stream so both through the legal arrangements at work but also the scrutiny of our regulated water and industry commission would absolutely make sure that customers can be totally assured of no risk of cross subsidy in that area thank you thank you convener on the Highlands and Islands and it will be no surprise that of great concern to me is the number of areas of market failure that my constituents suffer from or are victims of and I'm sorry to have to take the opportunity of telling you that I seem to receive a disproportionately high number of complaints about business stream on the Highlands and Islands and that relates to various problems disproportionately high times in dealing with billing inquiries and matters like that but I suppose one story illustrates the kind of nature of the problem and it was with regard to a new connection that had it not been a business connection had it been a domestic supply would have been of little consequence easily accomplished and yet the survey from business stream came from Glasgow a four hour journey cwca, look across at the water to the island he was supposed to visit and despite the fact that ferry was running as normal thought he might suffer from seasickness went back to Glasgow came out some months later and this resulted in a delay of six months or so for a simple business connection so my concern is and given bearing in mind that you'll understand why I'm heavily in favour of the principle of the universal service obligation we've talked about competitiveness and so on and my constituents going to suffer from a kind of market failure and given that competition can sometimes be a healthy thing and but you think that will have the effect of improving services from business stream to my constituents in the Highlands and Islands there shouldn't be any difference between your constituents and anybody else is quite frankly except an island is an island that it's maybe a wee bit harder to reach I've just been in Little Island two or three islands just recently in Orkney Shetland and Lewis and whole public meetings when I'm there just did it two months ago and we get some issues which I follow up developer wise as one of them because they're just a wee bit more remote but they can change to any one of these other 17 suppliers like tomorrow if they wish there's no need to stay with business stream to be fair to business stream they have when we formed it there were a lot of data issues because we just really charged people in the past on a rateable value and now there's metres everywhere all have to be read most businesses are metered not absolutely all because there's occasionally a problem but most by far we've put in 40,000 metres in the last two or three years so it's a kind of developing business in that way but we've just had a report probably you haven't got it yet from the SPSO this morning would you like to read that paragraph what they said about complaints just as a matter of interest this has just turned up so you've not seen this I was embargoed till lunchtime damn that's a scupper, we'll see you at 12 o'clock we can show you it's quite complimentary on how progress has been made but I have to say that when you start switching customers it's when data problems show up suddenly you find ah has supermarket X get more sites than we've thought or they've shut some that we didn't know so we've been data out for I don't know how long it's just been a huge, huge shop England's got all this pleasure to come cos they love the same issues it's just that they haven't shown up yet cos there's no competition so there's been a number of things that we have to clear up so I'm sure the examples you give us will be correct but there is a huge step change and we'll tell you at 12 o'clock what this report says and secondly they can switch anyway if they don't like business stream they can move they can if they wish it's not all business stream in fact one of the complaints I had when I was up in an island it turned out that somebody had switched the one who was business stream at all they'd actually signed up with somebody else didn't seem to know because to be fair to business stream the connections process in the retail space also includes an element of Scottish Water and we've talked about the market and the complexities of the market and Douglas is absolutely right so Joe runs the retail business there's complete barriers between Joe's part and the wholesale business in which I run the connections part of that what we realised probably about 12 months ago is that there was some complexities in the processes which were making it difficult for customers the processes were set up I think to suit businesses us rather than the customers so we've taken a long hard look at that working very closely with the retailers over the last 12 months and we've made significant improvements to the processes so if I can just give you an example about 12 months ago the average time for an enquiry and application to come in to the retailer to the time that they get a quotation for a connection was about 100 days and we've completely changed that process working primarily with business stream because most of the connections come through business stream because of the market share that they've got so we've been working with the retailers changed the processes and that has now reduced that timescale down to 15 days so we're dealing with all applications now to the point of quotation within 15 days Thank you very much for that because you've perfectly articulated the nature of some of the problems that we've been dealing with so I'm glad to hear that that's been dealt with but I'm sure you'll accept the principle that it's possible to have an overall set of results that look very good but within that when you drill down in particularly in areas like the Highlands and Islands which I'm readily accept present problems for any business it's possible to have a pretty poor performance across a sparse population so I'd be very interested in any information that you can share with us after lunch or after dinner or whenever that demonstrate that kind of principle of universal service, thank you If I can just point to that from a Scottish Water Angle because I think that the point is absolutely correct I mean we can look at our customer satisfaction scores and say I'll show how they rose last year by a couple percent on the previous year and look at where we're at in the current year we're contained to make really good progress but even within an overall really good set of results there are still some customers that don't get the level of service that they deserve so what we do is that we investigate every single source of dissatisfaction that we get back drive into root cause analysis and then work out what is it that we need to change is it a process issue, might be a geographical issue to make sure that we're endeavouring to give every customer irrespective of where they are in Scotland at a really high level of service That's very reassuring and I would be delighted if you can use that data to prove to me that I'm completely wrong Can I give an opportunity to respond to the points that have been raised? Firstly let me say that I am incredibly sympathetic to the Highlands and Islands situation being from Shetland myself so rest assured it's high on my agenda I think as Douglas says as an organisation in business stream we try to ensure that consistent level of service across the country there are times when that service is not as good as we would like and I think very much we see a focus on tackling that and making sure that we address the issues I'm more than happy to pick up your constituents issue offline if that's helpful for you but I would just reiterate the points that Peter made as an industry we've recognised that new connections has been a bit of a problem area because of the multiple interfaces between retailers and wholesalers but I would say that's one thing to try and address and try and improve it from a customer perspective Thank you very much and I'm perplexed at why you would ever leave Shetland but... We're going to move on to look at measuring Scottish waters performance and Mary you have some questions Yes, thank you The Water Industry Commission for Scotland measure your performance against the overall performance assessment and it's a scoring system and your target was 380 and Scottish waters scored 397 so could you tell me how that compares with water companies in England and are there any specific areas that you need to make additional improvements to? Okay, thank you The overall performance assessment was just to give a bit of context was a methodology that was set up in England back in the 1990s as a measure to drive up performance across the companies in England and Wales and by about 2007 or so they got to a point where the performances were pretty stable and it was pretty clear that the leading companies in England were delivering an OPA score in the 380 or 380 plus territory and it was because of that that the Water Industry Commission set us as target that by last year we should get our performance up to 380 or 380 plus then we could say that the level service customers in Scotland were getting was the same as the leading companies in England and Wales Now in terms of what's happened in England OPA as such was actually disbanded in 2011 they've gone on to a different mechanism that I could talk about if you're interested but what we've endeavoured to do is not just to look at well saying good we've beaten the 380 target we've also looked at performance to the extent that we can still benchmark those against the equivalent performance metrics in England and when we look across all the basket of measures for last year there are some that range from us being the clear leader to others where our performance is at the lower end of the spectrum but I think you can quite objectively say when you look across the whole basket of measures our performance is very much amongst the same level as the leading three or four companies in England and you've answered one of the questions I was going to ask you next was if England have changed the way the measure can you still compare but you've answered that so are there additional efforts in certain areas you need to make because you've said that some of your scores are above average and some there's further improvement so are there additional measures you need to take to match the top performers Okay a couple of different dimensions to that so in terms of the OPA side we're carrying that on into the next period and although our scores are at a very high level our first challenge is to sustain them at a very high level because the way this works you can lose points very easily so that's the first challenge about sustaining high performance when you come on to some specific areas probably the one that stands out most is improvements further improvements on drinking water quality and it's worse to put this into a longer term context because if I go back to the very early days of Scottish Water our water quality performance was at the level of 99.3% compliance we're now up to last year 99.91% compliance so you'll see in there that's been a dramatic transformation in water quality if you look at all the English companies they also all begin at 99.9% but it just might be that the final decimal point is a wee bit higher than our 99.91% so there's more that we can and that we will do to further improve drinking water quality and crucially to manage the risks to drinking water quality but I think the most significant area from a customer angle that we'll be focusing on in the next period is all around customer experience and it's one of the things that we've done a lot of work on in the past few years about driving up customer satisfaction but we're broadening and this is, I give real credit to the work of the customer forum who worked with us in coming in a greener plan for the next period but we're going to be focusing both on household customer experience and crucially linking it to the last subject matter to business customer experience and there's a set of quantitative measures in there and also qualitative measures so the quantitative measures are for example how are we doing in reducing the need to contact us, how are we getting on and reducing the incidence of complaints and some of the qualitative measures are all about the experience of customers whether they've contacted us or whether they've had a service experience but have chosen not to contact us so we'll be setting some stretching targets in there to drive how it feels in terms of that experience for customers across Scotland. Before I come on to ask you about ministerial targets as you've raised the issue of customer satisfaction and how many complaints were received in 2013-14 and how many were satisfactorily resolved? I'll take that one. We've seen a further improvement in the number of complaints so a further reduction of 12% in complaints over the year and I'm glad to see that that is improving even the first six months of this year we're on track for a further 25% of complaint reduction this year and that has been a journey that we've been on for quite a while where we've seen complaints reduced by 50% in this regulatory period from a starting point so we're getting down to a level which is particularly good in terms of your second point the second level of complaints so once we've finished dealing with a complaint customers can then go to the Scottish public sector ombudsman for what we call dealing with second tier complaints but again on that we've seen significant improvements over this regulatory period and a significant reduction of 85% in the number of referrals to the SPSO in 2013-14 so it went from 24 referrals a year forward down to 11 in 2013-14 and of these 11 referrals only three of the complaints were upheld I mean I see from your report that again it says about the 12% reduction in complaints but 12% of how much? 12% of 100 is a small number 12% of 10,000 how many complaints do you get? Sorry the absolute number for 2013-14 was 114 which amounts to 0.1% of the connected domestic properties that we have in Scotland Thank you and what further work are you doing to further reduce those complaints? Probably the key one for us and the reason that we've got to such a low level of complaints from where we were was that we significantly upskilled our complaints management team and changed all the process around to deal with complaint management with the primary objective that we wanted to give the customers the best possible service so they didn't have to go to the ombudsman when we had failed to resolve their complaints that was stage number one but what has also had a significant impact on that is Douglas mentioned that we now measure customer experience for every transaction that customer phones up whether that's a burst water main causing interruption to supplier, a water quality issue or a blockage to a sewer Anything that requires work done by Scottish Water we immediately send out a survey a customer experience survey to those customers Now we've implemented over the last 12 months a new real time system so that we get information back from customers from this survey in a real time basis and we can use that information a huge amount of information from it not just on the satisfaction score that customers are giving us but why they're giving us that score and as Douglas mentioned we do root cause analysis on it really quickly we go back to the customers we find out what we could have done better and we fix that and by responding to these really quickly that is also helping to drive down the complaints because we're getting on top of experience issues really quickly before customers feel frustrated enough to write in with a complaint letter to us It is interesting that the stream is moving to that system as well as it happens Could you provide committee with a summary of progress that you're making in meeting the ministerial targets that you've been set? Very much so Minister set targets for each regulatory period so we're nearly at the end of the 2010-15 period but they've actually also now set us objectives for the 2015-21 period so we're almost sitting on two sets of objectives so let me deal with each in turn in terms of the ones for the 2010-15 period we are in overall terms we're very much on track there are some areas of investment where we ran ahead of expectations there are one or two areas where we're running slightly behind but in overall terms and very importantly there is a mechanism that the Watering Commission put in place called the overall measure of delivery it's a capital equivalent of the OPA score to give stakeholders and government confidence are we overall on track or not with investment delivery and that OMD score is very much on track in terms of the 2015-21 period the First Minister announced those objectives a couple of months ago we are well on with some of the planning and preparatory work for that so there's a lot of study work going on we've got new investment alliances being put in place so that when we get to April next year we can hit the ground running in terms of delivery on the new investment programme can I specifically ask you about two of the objectives that are in your annual report and probably two of the most onerous and the ones that probably most of us get more complaints about than anything else and it's around the unsatisfactory intermittent discharges to rivers, locks and coastal waters and the other ones around reducing ODA issues for wastewater treatment works now if someone that lives quite near to wastewater treatment works I know how difficult ODA issues are to cope with but also how difficult they are to solve so if you could perhaps update us on how you're... Let me take each in turn so the objectives around the intermittent discharges from the sewage system just to again place a wee bit of context on that we've done a huge amount of work over the first 10-12 years of Scottish Water on upgrading wastewater treatment plants and so where the focus very much now is moved to making sure that the points of intermittent discharge in the sewage system so basically where stormwater will overflow at the times of high storm events that is to a satisfactory standard and the nature of the upgrades usually fall into one of two categories it may be that what we're needing to do is to make sure that all the sewage-related debris stays inside the system and therefore it's about having appropriate screening in place or it may be that actually for water quality reasons we need to hold the stormwater in the sewer until it can be taken down in the system to a point where it can be appropriately treated say to wastewater treatment plant most of that work in this period is focused on the Glasgow area and it's been a very very complex programme of work where we've worked very closely with SEPA, with Glasgow City Council and with other agencies in that area to understand what were the nature of the challenges and what are the right solutions to be placed not just by Scottish Water but what solutions are required by the other agencies as well it's a huge amount of study work has been done to come up with the right solutions and we're at a point where we're part way through delivery so there are some parts of the Glasgow system where those UIDs have now been made satisfactory so they're now satisfactory points of intermittent discharge then the other end of spectrum is a one that Ronnie Mercer called out the tunnel we're building on the south side which should give you a sense of scale in financial terms of over 100 million pounds but this is a tunnel that will run for five kilometres and it's four and a half metres in diameter so that must something equivalent to the size of this room broadly in diameter and that is absolutely in there from a water quality reason to make sure it can store the storm water and then convey it down to the treatment plant at the point when the storms abated so that particular project will the contracts be awarded but there's even a year's worth of preparatory works to be done before the tunnel boring machine can go in the ground but we expect that tunneling machine will go in in early 2016 and will run for 14 months so if I give it just by way of that illustration gives you a sense of the complexity of the programme and we're expecting this overall programme will be complete, this phase will be complete in 2018 If I come on to the second dimension which is around order from wastewater treatment works and I'll take it in two parts in terms of the areas where we were set targets in the current period about making upgrades for wastewater treatment plants those have all been made by the end of last year but what's been identified for the objectives for the next period is a couple of sites where we need to make further enhancements and that's been built into the ministerial objectives for the 2015-21 period but actually the reality with order is that most of the challenge comes down to operational vigilance there are times where what's required is maybe some additional to the capability of the assets to make sure that they minimise order but the real challenge is making sure that the way the plants are operated is in a completely vigilant manner to minimising order nuisance and in terms of responsibility that's split between us and our PFI companies but some of our largest wastewater treatment works are under a PFI contract now from a customer angle that makes no difference, it's our responsibility but what it does mean in quite significant areas we need to work through our PFI contractors to make sure that they're being vigilant in the control of order nuisance Thank you Can I move on now to sustainable development and ask how you intend to further reduce greenhouse gas emissions in the coming years Happy to do that I think this is an area where we've made very significant progress over recent years and most of the greenhouse gas emissions associated with our activity are to do with electricity consumption by the nature of a water company where a large electricity user so if I take the water system for example there will be places where water needs to be pumped but the treating of water to the very high standards requires use of electricity but I think the really good news for Scotland is that we have the lowest carbon footprint of any water company in the UK when it comes to the water service and that's largely down to the great foresight of our predecessors in having gravity fed water treatment systems where generally water is coming from upland sources down to more lowland communities on the wastewater side one of the consequences of all the work that we've done to improve wastewater discharges to meet all the EU standards is that we've now put in place treatment where previously there wasn't treatment and that in itself has driven up very significantly the amount of energy that we need to consume as a business so that's kind of the historical context so what we've done really to try and mitigate against that is that we've got a four strand approach towards energy we're firstly trying to reduce the amount of energy that we need to consume in the operation of assets and Peter's team have done a huge amount of work in that area and I might hand to Peter in a minute just to talk about some things that we've done operationally to drive down energy use we're also looking to drive up the amount of energy that we generate both directly ourselves through hydroelectricity through solar but also through wind and we're in a position where Scottish Water either directly or enables more renewable power than we consume in our activities and the final point I'll make before I hand over to Peter to talk about some of the specific measures is it's really really important to place this into context firstly we have had a good news story that notwithstanding the upward pressures on energy demand over the last seven years our operational carbon footprint has fallen by 18% and if you look at the actual energy that's used on a per customer basis the amount of energy consumed in providing water and wastewater to every home in Scotland is less than is consumed by an A rated fridge freezer but Peter so in terms of reducing consumption one of our biggest users of electricity is in pumps we have many many thousands of pumps across our assets all over the country so we're doing a number of things doing audits on pumps to see which pumps are efficient and in a number of cases it actually makes sense from a spend to save basis to upgrade the pump with a more energy efficient pump and the savings you'll get back on reduced energy pace for that in a very small period so we're doing quite a bit of that a lot of our wastewater treatment works have what we call aeration systems and that's part of the biological process to treat sewage as we put oxygen into the sewage now that oxygen has to be generated through large compressors and blowers and it's quite again an energy intensive process so what we're doing is that we can put simple things like timers variable speed gear boxes and things to and more controls so that we're actually reducing the amount of oxygen that we put in at times when you don't need it one of the other things is with the actual operational teams you can put lots of control equipment in new pumps but you need to educate operational staff as well what they need to do to maintain good energy and energy management practices on the site so we're doing quite a lot of development to bring our people up to the right standards to run their sites more efficiently and one of the other things I'll call out is probably is when we purchase our energy there's seasonal time of day tariffs which are far more expensive at particular points of the day so what we've done with that is that we've also looked at changing our automatic control systems to shut down the high energy using equipment during peak periods and then have them come back up again after that so we're doing that and it's costing less energy to do it so there's a number of different things that we're doing towards reducing energy consumption and I know that you have plans to increase in-house electricity generation so can you give us an overview of that and what impact that will have on customers' bills I think in terms of the impact on customer bills that's really been baked into our plans for the next six years so we have in agreeing our business plan of the customer forum then ultimately with the water industry commission we put in there the operational savings we'd make on the fact that we will have more renewable power in place so we've now got to go and work hard to deliver against that promise that we've made but to give you a sense of context here we currently use 450 gigawatt hours per year at the moment we're generating about 23 that'll go up to about 55 by the end of this year and to well over 60 in the next regulatory period but then really crucially is what we host in terms of wind generation on our site so there's already 350 gigawatt hours of energy that is produced on our land there are further schemes that have received Scottish Government consent that will produce a further 558 gigawatt hours and then we've got over another 300 gigawatt hours at various stages of planning development so when you add all of that up that is some significant multiple of the energy we consume ourselves thank you thank you just at the risk first of appearing a bit pedantic so that the members can envisage this Glasgow tunnel you described in your mind I would suggest that the width of the room is about 7 metres but this table I would say is widest points about 4.5 metres so that might help members envisage this tunnel I mean I think we all support your efforts to improve environmental quality I just wondered though if you were able to indicate in a kind of outcomes basis particularly with regard to wastewater and sewage discharges in our coastal waters and inland waters can you illustrate with data the effect of improvements to our waterways I suspect that the heart of your question is probably something I would need to pass over to SEPA because the way that the discharge standards for our wastewater treatment plants are set are all with regard to the capacity of the receiving waters to take treated effluent so it's they who very much look at what is the capacity of whether it's a highland burn or whether it's a, you know, the North Sea and it's based on the environmental sensitivity of the receiving water that they then back solve to the licence standard that we need to achieve but I think in very simple terms I would say if we're meeting our licence standard then SEPA effectively providing assurance to the country that the receiving water is then operating to the requisite environmental standard you'll understand my disappointment then when I've spoken to SEPA about these very issues and what I'm concerned about are things like equal concentrations that they also are unable to tell me that there's been an improvement and that strikes me as peculiar because if we think in terms of an outcome based way of looking at this surely that's what matters it's not having lots of nice shiny bright newly painted sewage water discharge plants it's the outcome that's important and Absolutely and that's why there's a if you think about the work that's gone on to set the minister's objectives for the next period a huge amount of work went on between Scottish Government ourselves and SEPA to look at the environmental improvements that we need to be delivered in the next period but very much working back the way there's an outcome that's required in the receiving water course so for example all these improvements to points of unsatisfactory intermittent discharge in the sewer system are all very much geared to then creating a satisfactory burn or river where these discharges may come out to so that is absolutely the focus but what I can from a Scottish water angle do is give you the precise statistics on the science of the receiving waters that really is for the SEPA's expertise but certainly our standards are designed to achieve that The idea is to have a lot less unplanned discharges that's quite a numerate thing to say we used to have so many a year and now we will have a lot less because we're holding the water instead of discharging it untreated we're holding it to treat it and there'll be some numeracy around that I think eventually Peter Where Douglas is absolutely right with the outcomes and it's SEPA that they need to determine what the outcomes are I hope we do know from a Scottish water perspective from the consents that SEPA set us for discharging that we've had some significant improvements in that so for example in wastewater pollution incidents and what we class is serious category 1 and 2 they're all categorised we've seen in this period 44% reduction in the number of pollution incidents from our assets in the lower priority pollution incidents we've seen a 20% reduction in those and from wastewater treatment works the compliance has been improving year on year and at the start of this regulatory period we had 39 of our wastewater treatment works that were failing to meet their consent standards we've now only got forecast of 2 so we do appreciate the catastrophic events are problematic I'm kind of more interested almost in the baseline levels if you see what I mean just moving on then it seems to me there have been a number of difficulties where Scottish water have gotten to kind of difficulties I suppose with partners in responsibility often local authorities who when talking about flood water run off and so on saying well that's really your problem it's not our problem and you're saying no no it's not and it seems to me the way forward in these situations is to recognise it's both parties' problem you feel you're making progress in relationships with local authorities in terms of undertaking these solutions in a spirit of joint responsibility and cooperation the short answer is absolutely yes but let me put a bit of colour on it this is an inherently complex area because there can be many sources of flooding and often what's a fair bit of investigation understand what's the root cause and whose responsibility is it and I think one of the really good things about the flood risk management act is that it places an onus on public bodies like ourselves to work collaboratively with SIPA and with local authorities in dealing with issues around flood risk so for example in the current regulatory period we've been undertaking five major flood risk studies in major urban areas such as Edinburgh and Dundee to understand what are the sources of flood risk and therefore who might need to do a future to minimise that risk to customers and having done five in this period we've signed up to doing 15 in the next regulatory period and those 15 areas have all been agreed on a collaborative basis with the Scottish Government SIPA and local authorities to identify the 15 next communities in Scotland that are at greatest flood risk so that each of the organisations can do the combined studies and then work out what each party needs to do to minimise the risk to its people Just continuing the theme of sustainable development and thinking about that in its widest context in terms of not just what you as an organisation do yourselves but how you facilitate what happens in the country at large you know how closely do you co-operate with local authorities for instance when they're taking forward their local development plans because you know I've certainly been aware of a few instances where what they thought was a part of their effective housing supply turned out not to be an effective housing supply area from your point of view Well this is an area where the answer today is different to what it would have been a year ago one of the things that I try and do is get around the country and meet all the local authority chief executives and those discussions have ranged largely from really quite brief meetings to discover that actually everything is going really well but in a couple of instances early in the year I realised that there was a gap in how we were handling things in Scottish Water and we were not as joined up as we needed to be so we've put in place a new development management team who are absolutely operating at the interface between local authorities, developers and with the knowledge of our own asset capabilities so if I take the northeast of Scotland as an example Aberdeen and Aberdeenshire where there's a lot of economic growth going on what that team are doing is absolutely working with Aberdeenshire Council and Aberdeenshire to understand where their plans are both as an enabler of development in that area but also as people who will be bringing forward their own specific plans for development developers in that area but also crucially understanding what is the capacity and capability in our water treatment plants and our networks to cope with additional growth and how do we optimise our networks so to the extent we need to enhance things we do that as cost effectively as we can so joining together if you like, Scottish Water Asset capability local authority planning aspirations and the real market led opportunities from the developers so it was a wee bit of a gap that we had and we're making very significant progress now in that area Mary Can I just briefly ask you about leakage before we move on because I well remember the last time you came to committee and the discussion we had around leakage and the fact that you had reached the economic level of leakage but despite that leakage is reducing by nine and a half million litres a day so has there been a renewed focus on reducing leakage or is leakage reducing because of other orbs are not on effect of other operational improvements that you're making Peter, would you like to... Mary, you're absolutely right when we had this discussion last year we were really proud to say that we had reached the economic level of leakage a year early and we did that probably half the time it took some of the English and Welsh companies to get to that so we're really pleased about that we have reduced further this year but I think the key reason for that now is that when we go out to our customers our customers are telling us even though we're looking at things from an economic perspective which is in essence that it costs you more to go and fix the leak than it does to allow it to waste the water customers are saying it's unacceptable to them to see leakage from our pipes and our huge consultation exercise that was one of the key messages that they said was a priority was to deal with particularly visible leakage much quicker than we have so we'd be continuing on the drive with that and there has also been a refresh of the economic level of leakage calculation and the range now is around 5 and 600 roughly we're currently sitting at 566 well 13, 14, 566 and we're pushing down to try and get as low as possible in that the other thing is looking forward the regulator has also recognised that customers want to see this going down further as well and he's built some incentives of 15 to 21 plan to get us to get down to the lower end of that range as quickly as we possibly can okay thank you for that thank you can I ask about the Water Resources Scotland act 2013 the majority of the provisions of the act are now in force can you provide the committee with an update on how Scottish Water is managing the implementation of the legislation and how it's working with its partners on the HydroNation agenda okay I think there are the act is a kind of you got many dimensions to it so let me try and quickly tackle through a few I think in terms of the HydroNation agenda there was a lot of work that we got going in anticipation of the act coming in to force so the work we've discussed already around our international business the work that we've got on going in renewables is absolutely in line with the expectations of the act I think another area that is quite interesting is work that we're now kicking off in the back of this to do with what we call sustainable rural communities and there's quite a bit of research we're doing in this area to look at how do we support life in rural communities and crucially how can we make them and even carbon neutral when it comes to water and wastewater services so there's research work going on in that area at the moment and hopefully we may get some innovations that we can bring forward in the future because historically investment in rural communities has often been relatively expensive and very energy intensive and maybe there are some smarter solutions we can come up with in the future another dimension of the act is all around how we manage water times of water shortage it might be hard to believe it but there are times in places in Scotland where we can get a wee bit tight for water and there's some very helpful provisions in the act but that also coincided with new provisions coming in on the back of the controlled activities regulations so taking the two of these together that has given us a new way of working with SEPA to deal with where we've had escalating issues of water shortage and we've been able to do that very quietly without any environmental damage but without any customer impact over the time since the act came into place and then the third dimension that I call out are the powers that you've given us to enter land premises to protect sources of raw water what I say are very helpful safeguard powers that you've given us but what we're endeavouring to do is to work really constructively collaboratively with landowners and land agencies to look at how we can promote improved might be farming practices to reduce the incidence of contaminants getting into let's say to rivers that might find a way into a water treatment plant but I think the fact that we've got those provisions in the act do give us a very helpful kind of backstop if we weren't successful in the more collaborative arrangements Does anyone else in the panel have anything to add to that? No, in that case we're going to move on to the strategic review of charges, Mark if you have some questions. Just to ask it if you are confident that Scottish Water will be able to meet its operating investment targets within the financial boundaries set by the water industry commission and what contingency plans will be placed for any potential financial shocks over that period? At this stage of the process to ask the word confident I certainly couldn't say unequivocally that we're confident when it happens that every time in this process there are some fairly big intakes of breath that you take when you're signing up to a whole new set of stretching efficiency targets and we've spent a long time as a board debating what we could live with and what we couldn't live with I have to say that when we accept a deal the board will only accept the deal if the executives tell them they can do better than that deal If you tell me you can just do that deal we don't want to know you've got to be able to tell me you can do better than that deal you've got to be able to beat the deal and that's my contingency so you now tell them what that is I think that the way we look at this is very much in the round so there's a whole set of objectives that need to be delivered and there's a certain amount of money and so what we're aiming to do is to deliver all those objectives for less than the total amount of money that we've got in place What I can't say is for every single sub-objective where we deliver that precisely for the amount of allocated money we take a much more holistic approach and a lot of the challenge is to get going early one of the great things that we've had about the benefit of this customer engagement and the agreement with the customer forum was we got the deal agreed back in February last year clearly it's now been endorsed through the regulatory process that has given us a year of early planning so we've got a team of people led by Peter looking absolutely how we try and meet our board's expectation of outperforming our plan delivering more efficiencies but crucially delivering them more quickly than was envisaged and that really is at the heart of this is how do we deliver more and how do we deliver more quickly so yes you're right there are risks and we have to go on the basis that some things won't go as planned and therefore we've got to build up contingencies we go forward so that we've got financial reserves to manage any shocks that might come about so I think to say confident would be too strong but absolutely committed and determined not just to deliver but to go and to outperform the settlement OK thanks that the final determination came from the commission on the 20th of November does that final determination does that make any changes that have any implication for the delivery of your business plan and are you able to set out any of those the firstly can I really just get you commend the water industry commission that came up with this very innovative process of getting Scottish water and its customers to agree the plan and it brought some really creative tensions into the process and I know that you had an evident session on that back in April and I think to their absolute credit they've recognised that and reflected that in the determination and the only change in the determination from the greed plan was the matter that Peter referred to a few moments ago and that was a creative scheme that's been put in place to incentivise us to get down to a leakage level of 500 Able to set out what would be what you would say would be your key priorities for the upcoming business plan I think at the highest level it's really delivering what our customers have asked us to deliver so there's some specific stuff around improving drinking water quality it's about improving the customer experience that we've been talking about there's a really big new commitment on sewer flooding I think one of the worst things that can happen to a water customer anywhere in the developed world is where a sewer system overflows not into a water course a point of intermittent discharge but overflows either into their open spaces or particularly inside their property The commitment that we've made and I think this is a first in the UK is for any customer who's at the highest risk of this level of flooding we define the highest risk of that happening probably in a one in ten year type basis then we've got a commitment that we're going to make upgrades to reduce the risk of that in the future and that's a very significant commitment to about 350 customers currently in Scotland today and other commitments but those are probably the ones that I would call out Touched on the overall performance assessment targets previously but with the new business plan in mind again whether it's confident or not a confident that you will be able to maintain those market leading standards for customer experience amongst water companies and satisfaction rate amongst all utilities I think the answer to that is we're absolutely determined to do that and we're gearing the whole way that we run the business to achieve that Ronnie was referencing earlier that we'd been up in three of the islands and that was part of a tour that we did of Scotland to meet all our employees face to face we were in 13 venues across Scotland from Glasgow to Lerwick very much engaging all our employees in the challenges and opportunities that lie ahead and what I was so encouraged about when I read not just the conversation that we had at day but reading the feedback forms from our employees the thing I really take out of it is this our employees recognise that we have been really successful yet they also recognise there's more that we can do that we can continue to deliver further improvements to our customers and is that what gives me confidence that across a three and a half thousand workforce they believe there's more we can do that gives me confidence it's that Finally, just on maintenance investment you've got in your plan that you have an annual spend of £280 million on capital maintenance on improving infrastructure do you think that's sufficient to see a reduction in some of the the pollution caused by for example the Glenfark water treatment approach do you think that plan maintenance investment is enough to see a real reduction in those incidents? Let's take this in two parts, maybe I'll do the first part and I'll ask Peter to come on and deal with some of the specifics about how we actually plan our maintenance in the business but at the highest level the £280 million is an increase in what we've had in the past and what that reflects is that over time we've got a more extensive asset stock so if you think about some of the new wastewater treatment plants we've built over the last 15-20 years we've now got bits of plant and equipment that need to be replaced where previously there was nothing that needed to be replaced and that's driving an increased maintenance requirement in accepting £280 million we're taking board a significant efficiency challenge because we need to get quite a bit more efficient to deliver our capital maintenance to absolutely meet your point to make sure that we can maintain service against this bigger asset stock for the amount of money that we've got available so come back to your confidence come back to our determination question we'll be absolutely determined to get every pound of value out of the £280 million and we'll be working very hard to make sure that we can manage our service risk for that money but I think it might be useful for Peter to talk about from maintenance angle and crucially link you into that kind of Glenforg type situation Glenforg in particular was an issue that was caused it was partly to do with an asset control issue but there was partly human error involved in that incident as well so clearly when it is human error we've got to upgrade our people in development to get them to deal with the incidents better than they have done in the past but from a maintenance point of view keeping the performance from your assets is one is about capital maintenance expenditure and keeping the stock of assets up to the right standard but we're putting a huge amount of effort now into operational maintenance of assets and what we call preventative maintenance so we've got a complete programme of works in place where we have every one of our critical assets with a maintenance plan and we're carrying out preventative operational maintenance tasks on that so that is looking at pieces of pumps equipment controls changing bearings, checking for temperature checking for oil contamination and fixing these problems proactively before they actually lead to an incident which may cause a pollution incident as Glenforg was into a local watercourse so a number of different things like that both from capital maintenance but also from an operational maintenance point of view to prevent our assets from failing Yeah, thanks gentlemen and lady sorry I wanted to ask about where we miss of is not to question you with regards to the increase that you're proposing over the next three years the 1.6% increase because these are obviously a steer times that we're living in and clearly household bills are a struggle for a lot of people in current circumstances the 1.6% rise in each of the next three years that's slightly ahead of the rate of inflation I think the CPI was 1.3% in October this year so can you explain why these increases this level of increase is necessary let me look at this in the context of the whole six year period what we've committed to in the six year period is that prices will fall by 1.8% relative to CPI so from our customer angle prices are going to keep falling in real terms over six years the landing on the CPI minus 1.8% when we were going through that with the customer forum was all very much in the context about what customers were looking for on that balance between maintaining high service the areas of service they wanted to improve relative to what they were looking for in terms of below inflation price increases clearly we could have come up with a settlement where prices went up by even less or reduced by even more relative inflation but what that would have then done is not given customers what they were asking for by way of service improvement so that's the context if I come into the specific of the 1.6 one of the things that came out from our customer engagement is what customers were looking for as well as if you like that below inflation price is certainty what would it mean in terms of the pockets and what we've come up with is a real first in the utility sector where every customer can know from a household budgeting angle what their bills will be and what they'll consist of next year but right out to 2018 so it's giving customers that certainty now in the way that inflation has come out you're absolutely right at the moment it's sitting at 1.3 then it looks as though the 1.6 may run a wee bit ahead all that does is increases the prospects that actually in the back years from 2018 to 21 we can keep the price limits the price is limited to 1.6% or if we continue in a very benign inflation environment over the next few years then maybe in 18 to 21 prices will be much less than than 1.6 but it's been very much rooted in listening to customers and engaging with their customers through the customer forum to try and land this in a place that they want and in terms of relief for customers who are struggling reliefs for them have you reviewed that material of your business? I think two parts to that I think the way that the charging structure operates in Scotland again bear in mind that we're starting with average charges £54 a year less than England Wales but the way that the charging structure operates where it's linked to the council tax band structure and then within that people who are single person occupants or those in full receipt of council tax benefit the way that they can get a further 25% discount means that if you're somebody in a band A house in receipt of a full 25% discount you're paying a quarter of somebody in a band H house and therefore inherently the charging structure provides huge affordability protection certainly relative to anything else that exists inside the rest of the UK but I think it's an area that is kept under review but crucially it's primarily a matter for the Scottish Government but it's the Scottish Government who set the principles of charging but they've committed that the whole area of affordability protection is something that they will review further over the next few years Thank you Can I ask about the cost to Scottish Water of the private finance initiative and going back to something that you said earlier in response to a question from Mr Ingram that the low cost of finance compared to private companies was one of the advantages of public ownership but of course one of the issues you have since 2002 since Scottish Water was established is that you have to finance and service the costs of the historic PFI contracts that you have inherited from the three predecessor water authorities and in your annual report at page 17 you say that the cost of PFI is what running in the financial year 2013-14 at £150 million now that's a significant figure particularly when you compare it with the expenditure on capital investment which is at £475 million so what I'd like to understand if I can first of all is what is the difference between the £150 million figure and the annual report and accounts and the figure quoted on page 69 of PFI operating costs of £109.3 million now I'm conscious that I'm not an accountant so okay let me let me again I'll set the context and I'll come and try and answer all the questions on the way through so absolutely right that we inherited nine PFI contracts eight of those cover waste water treatment for around 45% of the wastewater across Scotland and one specifically covers sludge treatment and disposal for around half of Scotland's sludge and sewage sludge is a by-product from the wastewater process but across all those nine we're dealing therefore with 45% for wastewater in total about 80% of our sludge so it's a huge part of our wastewater activities is done through these contracts and that's why we're talking about big sums of money all nine of the contracts are quite unique and they're all structured quite differently and I think if you went back in time they probably all represented quite good deals in their day but we continually keep each of those contracts under review both from an operational angle so referencing the previous conversation around order but also in terms of making sure that they are providing the best financial deal possible to our customers so we do keep under review as to whether it would be better to come up to some other arrangement but typically the way that they're all structured is that if we were to go and voluntarily terminate them we would be paying very significant sums by way of termination compensation therefore to date it has never represented good value to our customers to bring any of those contracts to a premature premature close interpret something for me that is in the the annual report just on that point of what the high costs of termination unilateral termination of contract would be because you have an interesting phrase which says other than each party's unilateral right to propose an amendment to a contract the most likely circumstance which would give rise to the renegotiation of a contract is as a result of a change in law which requires the manner in which the treatment and disposal service is delivered to be changed in order to ensure that it meets the requirements of such legislative changes are you hinting there that you want some legislative change to occur that would assist in that regard? I'm more hinting the fact that the reality is that requirements on us can change over time for example some years ago this Parliament passed an order code of practice as a result of the passing of that order code of practice we were required to adhere to higher standards of order control if we take the thing of Edinburgh at the Seafield wastewater treatment plant so we then had to agree a plan of action with City of Edinburgh council and get the PFI company to deal with that but because that was effectively a legislative change then that was a cost that we had to bear so you're not calling on the government to bring forward a change in legislation? no okay maybe the other question you asked me was a difference in the figures and this comes down to the way that things can be counted for in different contexts so the figure of £150 million a year is the total payment that we made in the year for those contracts reflecting if you like the operating and maintenance activities and all the financing obligations the figure of £109 million on page 169 is very much if you like the operating and maintenance component the financing obligations under international counting standards are dealt with separately okay I think that's clear are you in a position to say what the total cost of servicing the PFI contracts has been since 2002 and what the projected costs will be over the lifetime of the existing contracts bearing in mind that they will vary in length from 25 to 40 years no absolutely at a high level they will keep gently nudging up by some factor less than inflation typically the contract prices move is by about 75% of inflation which recognises about 75% of the costs of the PFI company are subject to inflation pressures and 25% typically linked to the financing is fixed so if it is a kind of as already recognised if you take that £150 million and inflate it by about three quarters of inflation on a future basis be able to supply the committee with some well happily to supply that after the opportunity to be in what the projected costs will be absolutely and certainly as far as the 2015 to 21 period those are absolutely all reflected in our business plan and our agreement with customers for that period a couple of other points of clarification you say in the annual report that Scottish Water has the power to levy payment deductions with a level of service falls below predetermined standards has that happened in the last financial year and what is the value of those what is the value of those deductions short answer but we are talking very small sums of money but we could happily supply that to you after I am interested in this because I know that with other PFI contracts with the water industry there are limits through the contract that are placed on what deductions can be made I misinterpreted your question so I thought you were talking about on the PFI side yes there is a very complex mechanism of payment adjustments and we certainly have that information what I just will need to just check is whether there is any particular commercial confidentiality around that but subject to that then we can make that available to you outside the meeting again okay thank you interesting what you had to say about obviously you very you manage your business robustly to ensure best value both for the customer and for the taxpayer and that you keep these contracts under review I would just like to know a little bit more about how you do that in practice do you work with the Scottish Futures Trust for example to ensure that you deliver best value primarily it is about working with each of the PFI companies in terms of understanding the performance of the plants understanding what their financial and strategic objectives might be and keeping that under review so that's a primary focus but we do meet from time to time with Futures Trust and I have a meeting with the Chief Executive of the Scottish Futures Trust early in 2015 okay that's fine can I ask you about the transatlantic trade and investment partnership of any that has for Scottish Water in the industry I am unaware of any implications that it will have for us okay there have been some suggestion in one of the press not that we can believe everything that we need in the press that this could indeed have implications and I was just curious in the context of the discussion we just had on PFI we have seen reference to that and some of our colleagues will be following up with the people with particular suggestions but as I come back to it I am unaware of any impact that that will have on us okay and just for completeness on a subject can you give an assurance to the committee that you will continue to focus on improving road reinstatements by contractors as those continue to be an issue of concern to road users I'll take that we it's a very good point because Scottish Water carries out 35% of road reinstatements across the country from all utilities so for example in 1314 we did 33,546 reinstatements I think that's one of the areas that a few years ago I was particularly concerned about because we don't do our own reinstatements we contract this out to specialist contractors whose bread and butter is to do reinstatements in Canada's ways and I was astonished to find out that they couldn't actually comply with the standard so we've worked really really hard with our subcontractors and over the last few years in particular we've moved we've moved compliance that we have with the road reinstatements from 50% up to 92% and the standard that has been set by the road works commissioner is for utilities to get above 90% so we are absolutely delighted that we are up at 92% we have a reinstatement quality board that we've set up with the contractors we meet with them on a short interval basis because we realise how important this is to make sure that compliance is maintained at the high standard that we have so yes a very high focus on these things have done for a few years and maintaining that focus going forward Jim and confident that we can maintain that standard that we need to Okay can I invite members to ask any final questions that we have Mike? Yeah a couple of brief questions I notice in terms of your investment that you'll be making from 2015 to 2021 and improvements enhancements that we're looking at at a sum of just above 1.3 billion and it's quite a significant amount of money and also just being aware of the fact that Scottish Water inherited a largely Victorian infrastructure that was passed itself by dating many ways and that standards are continually driving investment higher standards but will there come a point where you can see the need for that investment level to be reduced a bit having largely achieved the objective of getting us an infrastructure that's fit for purpose or will always face that level of investment going on into the future past 2021? I think I'll answer this because we've been asked it many times before and it's a good question because it's a lot of money there's not enough lot of things in what you just said but the fact is that we started higher than this it was like £600 million a year even when I showed up here and we've driven that down to about 500 and it's really much better the lower you get it because the lower you have that number the more efficient you can be at spending it so I was really determined to get it done a bit so that it could be more controllable where you get better efficiency as with a 16% efficiency in capital spend for the next six years which is one of the things the board had to test my colleagues on either side the executives on whether they could manage it or not but the fact is that all of that can have £500 million a year that I mentioned in my opening remarks there's over half of its capital maintenance because of the number of new sites that you've built in recent years to obey the urban waste water treatment directive and all the other directives that come out you have more maintenance to do because you've had to build these things to start with so I think we said 280 million of the 500 this morning was was capital maintenance and the rest is kind of new things that we're having to do so I can't see at the moment where it'll dip much below that if the next six years it will be that and there's never a point here when you get everything done because you just have to keep going and it's continuous improvement continuous improvement so we have to kind of try and be totally efficient and keep the customers' bills down despite the fact that we will I think need to do something like that for the foreseeable future and I think we should count on having to do that yes thank you and just the last question is there a more general point I suppose but I was very interested to read the report that deals with remuneration not about the remuneration itself but you'll know the First Minister's just appointed a gender balanced cabinet and is encouraging every organisation to follow suit and I'm sorry to say Scottish Water don't appear to be making much progress in that direction in terms of your board or senior management is that part of your plan going on yes, we're totally aware of the objectives that the Government has and we for example we tended to have in the past you appointed by competence and the board members I think have got the competence required which is why the business is doing quite well but we're very aware of what you've just said so we have invited someone to join us in January for a year to help develop female future board members and we've got someone come in, not from Scottish Water but from a different business entirely to join our board for a year as part of an initiative to help people to get into the workings of a board at that level and it's a lady joining us Jackie Maran in January so we're aware of it the other thing we need to do I've spoken to our civil service colleagues about this because there's always a danger that if we just advertise in the usual way looking for non-executive board members we kind of finish up most times way if we're looking for two white middle class males it's what seems to come out the end of it so when we talk about targets and say well it would be good for us to have a 40% target I want to reinterpret the definition of target we need to target females instead of hoping they apply we need to target people to come in they wouldn't be appointed right way they would at least put it into the interview process because right now there's not that many apply and we need to target them and even getting this lady in next year somebody that will go on a board somewhere I would think it might be ours eventually so we are conscious of the position you look up the page and you say there's not much female presence there and we're really trying to move towards doing more so when we reappoint people come to end of terms we should be targeting females and using the good females that we have because there's one sitting next to me for a start Joe will mix with others in the business Peacock Douglas has an excellent HR person they can tell us who to look for and we should be doing that there are some empty seats maybe on your next visit to the parliament some ladies could be present one out of four certainly beats what we've got in this book at least it was a step forward are there any closing remarks that you would like to make? no I'm really pleased to have this session because we try to be as efficient as the best private companies and a private company would turn up in front of its shareholders twice a year I guess or once a year and do this so we're happy to do it with you as a shareholder delighted to to be able to come in if we can't answer to you then there's something we're doing wrong so we feel that we enjoy doing that in fact it's very grateful as a committee for your attendance this morning and thank you very much for the evidence that you've provided I'd also like to mention that this is likely to be Mr Mercer's final appearance before the committee as you said earlier everything moves on in life and I understand that you will be relinquishing your role as chair of Scottish Waters in the spring but on behalf of the committee I would like to wish you the very best for the future and I'd also like to mention that Myra Lechier, committee assistant is moving on to a new post in the parliament I'd like to thank Myra for all her hard work in keeping us organised over the past two years so thank you Myra the committee will next meet on Wednesday 7 January 2015 this will be an informal meeting with housing association representatives followed by a session with tenant organisations papers for this meeting will be issued to all members on 5 January it only remains for me to wish witnesses the committee and the clerking team a merry Christmas and an enjoyable recess and I now close this meeting of the committee