SUBMISSION BY DIAGEO

Background

Diageo in Scotland operates 50 separate sites ranging from distilleries and maltings to warehouse complexes and packaging plants.

The company is the largest premium drinks business in the world and 40% of our global production is manufactured here in Scotland – this includes both Scotch whisky and white spirits such as gin and vodka. Water is fundamental to the creation of all our brands and, on average, we use over 16 million cubic metres of water per year.

Of that total, nearly 3 million cubic metres is supplied from boreholes, wells or other private supplies and 11 million cubic metres from rivers and lakes. The remaining 2 million cubic metres is drawn from the public system which costs us about £1.25 million per year.

However, the nature of the distillation process is that well over 90% of the water we use is for cooling purposes. Effectively, therefore we ‘borrow’ water and we return it to the environment back to watercourses under consent conditions.

In total, our effluent discharge whether to the public sewer or as trade effluent charges costs us £1 million per year.

Our environmental policy states that we shall ‘source water responsibly, use it efficiently and set targets for reduction in its use’.

Diageo has no strong view on proposals outlined in Parts 3 and 4 of the Bill and so our comments relate only to Parts 1 and 2.

Part 1

Is the scope and effect of the change appropriate?

Diageo welcomes the proposed creation of the Water Industry Commission and supports the move to place powers with an expert panel rather than an individual. We would recommend that the Commission should include industry representatives and suggest that a representative from the Large Water Users Group be given a place on the Commission to provide technical and economic input.

However, we believe that the proposed system of annual review of charges could introduce greater uncertainty into long term financial planning. We believe that we have paid a fair and reasonable price to Scottish Water for water services in the past and that the relationship has been of mutual benefit. Both companies have been able financially to plan ahead because of negotiated contracts over a number of years, and there have also been cases where our use of Scottish Water’s services has made its operations more viable.

An example of this was the distilling industry’s purchase of the long sea outfall at Burghead which was an innovative partnership between the public and private sector. By separating trade and domestic effluent, this drastically reduced the investment required by NoSWA for a large treatment plant to serve villages on the Moray coast.

Will the proposals achieve the stated aims of improving the transparency, accountability and consistency of regulation in the water industry?

Diageo hopes the shift towards using a board rather than an individual will lead to greater accountability and transparency. We do however have some concerns with the arrangements for the right of appeal mechanism on charging. Currently this lies with the Scottish Executive but the proposals as they stand will mean that appeals are heard by the Competition Commission, which is UK based. We believe that the Competition Commission may not be in a position to best understand the unique Scottish context of the whisky distilling business.

As a company producing Scotch whisky we would prefer that any appeals are dealt with in Scotland. Whilst we can understand some of the rationale for removing Ministers as final arbiter, we prefer the current appeal system which we feel is the best model at present.

Part 2

Are the Provisions in this Part of the Bill appropriate and clearly defined?

Diageo supports the principles of the Bill and understands the Executive’s need for prohibition of common carriage. We also support Scottish Water as the main supplier and understand the need for an upgrading of the water infrastructure. At the same time, an equitable balance of charges must be struck between domestic and commercial users.

Diageo does have concerns, however, that there appears to be no flexibility in the current proposals to allow for local negotiation on charges for water and sewerage services. There would therefore be less opportunity for large users to benefit from economies of scale or discuss potential partnerships.

An example of these special agreements is when we negotiated a long-term deal with WoSWA for the disposal of effluent from Port Dundas Distillery in Glasgow. It was at the time of a private funded initiative to expand and upgrade the treatment plant at Dalmuir. To enable this development to go ahead with some financial certainty, a five year deal between ourselves and WoSWA was agreed.

From our understanding of the Bill’s proposals, this above example would not be possible. Both Diageo and Scottish Water would thus be put at an unnecessary disadvantage.

Our view is that large water users should be encouraged to minimise use of water and effluent services. However, any high standing charge – once paid – is not an incentive for businesses to minimise use. Diageo would advocate a lower standing charge with a higher unit cost to encourage water conservation.

We would also advocate increasing the banding for water charges so that there is a broader range of bands that will take account of larger water users.

The proposed ‘principles of charging’ compares the provision of water and effluent services to other utilities for which direct payment is made and that customers should be expected to pay for the services in the same way. However, the proposals – for example the prohibition of common carriage – mean that Scottish Water will effectively hold a monopoly of supply and customers could be unable to negotiate services with other suppliers of water.

Although the Bill allows Scottish Water to act as ‘wholesalers’ of water to third party suppliers, it is not clear how this could be effected at a competitive cost. Therefore the proposals don’t appear to give businesses any real flexibility to source water services from other suppliers as they can do with other utilities. Although there will be some flexibility with the retail supplier, Scottish Water will still supply the water to the pipes and the basic charges will remain fixed. Thus, there is little room for charging flexibility between companies and the retail supplier.

As a result we may need to look at other means of securing water supplies.

If it is the case that there is little flexibility over the basic cost of water charges as Scottish Water are the only ‘wholesaler’ then it would put our business at a clear disadvantage to those in the England & Wales where other suppliers are able to use the public network.

What are the likely effects of the provisions on the fair and effective provision of water and sewerage services?

Diageo are concerned that the proposals may lead to significant increases in cost which may, in turn, impact on our cost effectiveness. Overall, our costs of water and sewerage services across Scotland are set to rise by nearly 40% under the proposals and at Port Dundas Distillery - which is our largest user of public water – we have been notified that the increase could be as much as 75%. Clearly, this represents a significant increase to our costs.

We are a global company and therefore we need to compete globally and we will need to take decisions to maintain our competitive position. Already at Port Dundas, through process improvements, we have reduced our water usage by 20%. In future, we may need to investigate ways to source ‘grey water’ from other suppliers.

In addition, companies such as ours may need to set up their own treatment plants or find alternative means of disposal. We have already gone down this route at Cameronbridge Distillery in Fife where we invested £5 million on a long sea outfall to take us out of the public system,

However, by law, Scotch whisky can be made only in Scotland – even if the costs are rising.

Our concern is that if the costs of water supply and effluent treatment increase by significant amounts then many other large water users will reassess their options given the commercial environment in which we all operate.

If these large water users decide not to use Scottish Water’s services then there could be significantly less money going into the public system. This will of course impact upon the planned upgrade of the network. Thus we believe that the charging system must be carefully considered so that it does not become prohibitive to large water users.

Conclusions

• There is need for flexibility in the relationship between Scottish Water and non-domestic customers and within the proposed fee charging regime.

• There needs to be clarification about the role of the newly created commission and how the right of appeal mechanism will work. We also have concerns that the UK based Competition Commission may not fully understand our industry’s issues in the same way that Executive Minister’s can.

• For large users like ourselves, Scottish Water may not be the only service supplier. There are other supply and effluent treatment options that Diageo could develop.