Mystery firm aims to make waves in water

Scotland's big three water authorities are set to receive the first realistic challenge to their monopoly on the provision of supplies and sewerage treatment from one of the major privately owned European utility companies.

Alan Sutherland, the water commissioner for Scotland, confirmed that he had been approached by the unnamed business asking for details on the terms and conditions which would enable it to make use of the existing national water pipe network and treatment works.

"I was informed that the company, which is an existing player in the water industry, intended to write to each of the three water authorities to find out more about making use of the network for private use," he said.

While the unnamed firm is keeping its final intentions under wraps at this stage, it could attempt to undercut the existing authorities on sewerage treatment or even arrange to buy bulk water at a discount to sell on to current users.

On March 1, the Competition Act of 1998 came into force - and it was only a matter of time before an outsider moved to break into the Scottish water industry, claim industry experts.

The act effectively bans abuse of a dominant market position and means that East of Scotland, West of Scotland and North of Scotland Water all have to offer the use of their networks to possible competitors on realistic commercial terms.

At the time the law came into force, leading Scottish lawyer Gordon Downie, at commercial law firm Shepherd and Wedderburn, forecast that it could usher in a new era of competition which could eventually push down prices. "Private companies such as multi- utilities will undoubtedly be keen to exploit any opening which allows them to provide water and sewage supply services to Scottish businesses in competition with the big three existing water authorities," he said. "Consequently, the water charge increases announced by the Scottish Executive could prove to be temporary."

The current move comes at a time when the Scottish Executive is preparing to face up to the new challenges through a consultative paper on the industry due to be published later this summer.

Sutherland, who effectively acts as a watchdog on the industry on behalf of consumers, said: "This is a commercial matter and my understanding is that the Scottish Executive is in favour of competition on the general belief that it is something which benefits consumers."

Few expect the Executive will plump for an English-style wholesale sell-off of assets, despite the temptation to leave privately owned companies with the job of finding funds for the spending needed to bring water services up to European standards.

This investment drive was the main factor behind the hike in charges this spring which led to increases of around 15% for most households but a massive 35% hike in the north of Scotland. Despite the rise, average household bills are still about 10% less than those south of the Border, where privately owned operators have to make profits and pay dividends to their shareholders. Charges to industrial users are broadly in line on both sides of the Border, and these users could be prime targets for newcomers to the Scottish market.

The water commissioner said the Scottish industry was now having to make up for years of under-investment, including the need to meet European standards for discharge of sewerage into the sea around coastal areas. This investment programme is likely to be in excess of #1.5 billion over the next three years, with the bulk of it due to be found by the end of 2002.

After years of good growth and bumper dividends, the water companies now operating in England - including giant French-owned utilities - have fallen out of investment favour as the industry regulator, Ofwat, has responded to public pressure by imposing tighter pricing controls. As a result, they are looking for new markets and economies of scale.

The danger is that they could attempt to cherry-pick which services they provide, leaving less profitable services in the hands of the Scottish water authorities.

Ahead of any incursion by foreign utility companies, the relatively small Northumbrian Water has shown the way things could go through a recent deal to become water adviser to Scottish Courage in Scotland and north-east England. At this stage its main purpose in Scotland is to negotiate with the current supplier in areas such as tariffs while ensuring the brewery takes action to minimise water use and reduce its waste stream. But one industry watcher said the deal could be extended to other industrial users and could provide valuable experience for any move to attract private households.

"I'm not saying that this is in Northumbrian's plans, but any water company could quickly build up a presence in Scotland by buying supplies from the existing authorities and then selling them to the public at a discount," he stressed. "Initially it would involve losses, but pretty soon the company would have a sizeable customer base."

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