The Basis Of Our Draft Determination

The statutory framework within which we operate

The Commission has a statutory duty to promote the interests of water and sewerage customers in Scotland. We do this by determining the ‘lowest reasonable overall cost’ that Scottish Water will have to incur if it is to meet the Scottish Ministers’ environmental, quality and customer service objectives for the sector. The cap on the amount of charges that we determine is the maximum amount of charges that Scottish Water can levy on its customers and, subsequently, Scottish Water’s annual Schemes of Charges that we agree must also comply with both the Scottish Ministers’ Principles of Charging and our determination.

The process we undertake is called a Strategic Review of Charges. The current Strategic Review process covers the period 2021-27 (SRC21). It is the sixth such review that has been undertaken in the Scottish water sector.

Ministers initiated the SRC21 through an official commissioning letter to us in January 2017. This set out the initial policy framework and timetable.

An updated Commissioning letter was provided in June 2019 and this included a revised timetable for the SRC21. A further letter was provided in October 2020 setting out a subsequent revised timetable in light of the Covid-19 pandemic. These letters are included as Appendices 1, 2 and 3.

The charges determination process is set out on the following page.

The Scottish water sector journey

The Scottish water sector has come a long way. When Scottish Water was created in 2002 its operating costs, adjusted for its geography and assets, were nearly double those of the best performing private company in England.

Its level of service as measured by the Overall Performance Assessment lagged 67% behind the leading companies south of the border. Its leakage was double its sustainable level. There was a considerable backlog of investment.

Since 2002, Scottish Water has invested annually more per person (an average of £135 in 2020 prices) than any water company in England and Wales. Its service levels are as good as have ever been recorded by any company in Great Britain and its leakage has reduced significantly.

While Scottish Water has invested over 30% more per person than the average company south of the border, its operating cost savings have ensured that the average household pays £372, 24% (or £90) less than it otherwise would have done. Since 2002, average household charges have fallen by 10% in real terms. As a result, average water charges – despite Scotland’s much more rural and challenging geography – are among the lowest in Great Britain. In England and Wales, the average increase has been 4% in real terms over the same period - charges are therefore 16% lower relative to the England and Wales average than they were in 2002⁶.

In spite of these improvements there is no room for complacency. Our work with Scottish Water has identified that by 2040, Scottish Water will have to be investing more than twice as much each year (in real terms). If we fail to invest, service levels will deteriorate and the water quality and environmental improvements achieved over the past 20 years will be put at risk. It is increasingly difficult and expensive to reverse a trend of deteriorating performance, the longer it has been allowed to persist. The challenges that Scottish Water faced when it was first established in 2002 represent a clear warning as to the consequences of consistent underinvestment.

The Scottish Ministers’ revised commissioning letter in June 2019 asked the sector (Scottish Water, SEPA, DWQR, CAS, the Customer Forum and the Commission) to develop and work towards a coherent vision. The sector has since developed its common vision:

THE SECTOR VISION

Together we will support the health and wellbeing of the nation. We will ensure that all of Scotland gets excellent quality drinking water that people can enjoy all of the time. Scotland’s waste water will be collected, treated and recycled in ways that generate value and protect the environment. We will enable the economy to prosper.
We will transform how we work to live within the means of our planet’s resources, enhance the natural environment and maximise our positive contribution to Scotland achieving net zero emissions.
We will involve and inspire Scotland’s people to love their water and only use what they need. We will promote access to the natural environment and encourage communities to enjoy and protect it.
We will be agile and will collaborate within the sector and with others to be resilient to the challenges that will face us. We will keep services affordable by innovating and delivering the greatest possible value from our resources, helping those who need it most. We will serve all customers and communities in a way that is fair and equitable to present and future generations.
We are a vital part of a flourishing Scotland.

It is within this policy framework, set out in the Objectives of the Scottish Ministers and their Statement on the Principles of Charging, that we have undertaken our review.

The Scottish Government has set Scottish Water the challenge to achieve net zero emissions on both operational and embodied⁷ carbon by 2040.

If Scottish Water were not to invest in adapting its assets to deal with our changing climate, there would likely be consequences for the reliability and quality of services that can all too easily be taken for granted. There is a clear cost to committing the required investment, but equally, customers would experience a significant cost in deteriorating levels of service if this investment is not made in a timely manner⁸.

Achieving the net zero emissions target and the future vision will require Scottish Water fundamentally to transform the way in which it manages and develops its network. We require Scottish Water to do this in an economically optimal way which ensures that levels of service and security of supply are maintained at all times. As such, Scottish Water will have to take account of circular economy principles, the benefits of natural and social capital, and the costs of carbon over the lifetime of its assets.

Our transparent and consultative approach to SRC21

We have run a fully transparent and consultative process since the start of SRC21. We began discussions on our emerging thinking in relation to the regulatory framework in 2016, holding a series of collaborative advisory panels and stakeholder brainstorming sessions.

These discussions formed the basis of our methodology, ‘Innovation and collaboration: futureproofing the water industry for customers’, published in April 2017. The document identified the need for a different regulatory approach on the basis that, although Scottish Water had responded well to previous reviews, the challenges the sector was facing were now longer term in nature and required a more flexible approach if they were to be met effectively.

The methodology explained our proposal to move to Ethical Business Regulation (EBR), an approach based on the work of Professor Christopher Hodges of the University of Oxford⁹. EBR supports longer term thinking by requiring candour in all conversations and interactions between regulator and regulated company. It seeks to avoid, or at least to reduce substantially, asymmetries of information and the risk of time inconsistency.

The approach contrasts with the previous focus purely on how much money is spent during a regulatory control period. It is the appropriate response of a regulator to a company that adopts Ethical Business Practice (EBP). The Commission is convinced that EBR can bring material benefits to delivering better outcomes for all stakeholders. It should allow Scottish Water the opportunity to achieve its target of net zero emissions in an economically optimal way, unconstrained by the arbitrary deadlines of fixed regulatory control periods.

Following close working with stakeholders, we refined and clarified our approach in November 2018. Over the period between then and February 2020 we published a series of 23 Decision Papers. In these documents we set out our views on all material aspects of the Strategic Review and explained what we would consider consistent with Scottish Water delivering the ministerial Objectives at the lowest reasonable overall cost.

Stakeholders were consulted at every stage and this engagement was underpinned by robust analysis and by extensive customer research commissioned by the Research Co-ordination Group¹⁰.

Timeline of the Strategic Review of Charges process

FEB 2017

The Scottish Government issues the Commissioning letter for 2021-27 Strategic Review of Charges
APRIL 2017

WICS publishes its methodology document
MAY 2017

Customer Forum established
JUN-OCT 2017

WICS publishes its initial decision papers on initial ranges for the key inputs to Strategic Review
FEB 2018

Scottish Water publishes its draft Strategic Projections for consultation
APRIL 2018

The Scottish Government issues its draft Principles of Charging and ministerial Objectives
JUL-NOV 2018

WICS publishes its 2018 Decision Papers
NOV 2018

WICS publishes its methodology refinements and clarifications
JUNE 2019

The Scottish Government issues a revised Commissioning letter for the Strategic Review of Charges 2021-27
JULY 2019

WICS publishes its 2019 Decision Paper on asset replacement
JAN 2020

The Scottish Government consults on its updated draft Principles of Charging and ministerial Objectives
FEB 2020

Scottish Water publishes its Strategic Plan
FEB 2020

WICS publishes its Prospects for Prices paper
FEB 2020

The Customer Forum agreed Scottish Water’s Strategic Plan in principle
SEP 2020

Scottish Water agreement with Customer Forum on expectations for the Transformation Plan and the future of customer involvement
OCT 2020

WICS publishes its draft determination for consultation
NOV 2020*

The Scottish Government publishes its final Principles of Charging and ministerial Objectives
DEC 2020*

WICS publishes its final determination
FEB 2021*

Scottish Water decides whether or not to accept the final determination
FEB 2021*

Scottish Water submits 2021 Scheme of Charges to the Commission for approval
MARCH 2021*

Scottish Water submits its Delivery Plan for the 2021-27 period to the Scottish Ministers for approval
NOVEMBER 2021*

OECD Report to Network of Economic Regulators (NER)

*Expected

Customer representation within the process

At the last Strategic Review of Charges (covering 2015-21) the Commission set out to ensure that customers’ views were at the heart of the process. A new body, the Customer Forum, was asked to establish what it considered to be reasonable within a framework, for the determination of the maximum amount of charges set out by the Commission as consistent with the effective and efficient delivery of the Ministers’ Objectives.

The Commission recognised that customer input would again be critically important to the SRC21 process as the sector began to consider how to address both the much longer term challenges of asset replacement and resilience and the need to adapt to and mitigate climate change. Along with Citizens Advice Scotland and Scottish Water, we therefore established a second Customer Forum. Throughout SRC21 the Forum has championed the priorities and preferences of customers for 2021-27 and for the longer term, based on a programme of research undertaken with Scottish Water and other stakeholders.

The initial intention was for the Forum to seek to agree the maximum amount of charges with Scottish Water that were consistent with our Decision Papers (in a similar way that the first Customer Forum had done at the previous review). As we worked with Scottish Water better to understand the asset resilience challenge, however, it became clear that the second Forum should play an important role in working with Scottish Water as it developed its Strategic Plan. The broader customer interest required that the Forum should focus not solely on the maximum amount of charges for the next regulatory control period, but engage more in the Plan’s development and ensure it reflected the priorities of customers and communities. Having provided its input into the co-created Plan, the Forum agreed the final Strategic Plan in January 2020.

Our final Decision Paper, Prospects for Prices, set out the Commission’s latest thinking on the maximum amount of charges that should apply for 2021-27. The Commission also set out its thinking on charges in a longer term context and provided its indicative view of what would be required in the 2027-33 regulatory control period.

This paved the way for the Customer Forum to seek to agree the maximum amount and advance any thinking on an appropriate profile for charges during the regulatory control period such that Scottish Water could deliver Ministers’ Objectives in a manner consistent with the Principles of Charging.

In the event, however, this has not proved possible because the Covid-19 pandemic forced a change of approach. It quickly became clear that Scottish Water would require flexibility in how it utilised the cap on the total amount of charges that we would set and that a fixed profile for the next six years would be inappropriate.

As a result of this change, we asked the Customer Forum to focus on two critical questions:

How should Scottish Water’s Transformation Plan reflect customers’ expectations? and
How should Scottish Water deliver on its commitment to become more customer-centric and community focused?

We consider that addressing these questions built on the substantial commitment of the Customer Forum in inputting to Scottish Water’s Strategic Plan. The Customer Forum was able to reach an agreement with Scottish Water on how these questions should be addressed (see Appendices 6 and 7), which the Commission fully endorses. The agreement includes a commitment from Scottish Water to adopt the principle that ‘every decision should be the one it would take if the customer were in the room’. It also confirms proposals for a national engagement programme to listen to customers and communities and to understand their needs and aspirations.

The total amount of charges ensures that Scottish Water will be adequately funded provided it meets its efficiency targets. As such, it should be able to make good progress in improving the resilience of its levels of service and towards meeting its net zero emissions target. The Commission will report on its view of progress each year. Scottish Water will seek the agreement of the Commission to its annual Scheme of Charges. In so doing they will be able to take account both of their national engagement programme and the expected growth of household and non-household customers year-on-year.

The Covid-19 pandemic

When we published Prospects for Prices in February 2020 it was our expectation, based on the agreed timeline and milestones for the Strategic Review, that we were entering into the final stage of the process. However, just a few weeks later the pandemic started to take hold, bringing major disruption to all aspects of life and to every business and household in Scotland.

The pandemic required us to delay publication of the draft determination (originally scheduled for May 2020) to allow additional time to consider the pandemic’s implications.

For Scottish Water, the pandemic has inevitably brought a range of short-term impacts on day-to-day operations, capital programme delivery and company finances. It is not yet possible to establish the full extent of these impacts and how long they will persist, but it is clear that they will be significant and that they will affect Scottish Water’s financial position in the next regulatory period and beyond.

For many businesses and households, the pandemic has brought an economic shock that will affect business liquidity, debt levels and personal incomes. It appears inevitable that a significant number of businesses will struggle to survive, while many household incomes will be under severe pressure in the months and years ahead.

Looking forward, it is also clear that government measures to encourage the recovery from the pandemic are likely to impact on Scottish Water. Both the Scottish Government Advisory Group on Economic Recovery¹¹ and the Infrastructure Commission for Scotland¹² have noted that a key response to the crisis should be a focus on the ‘green recovery’. This primarily targets infrastructure investment and accelerating progress with the transition to net zero emissions. As a major infrastructure business – with a clear target set by Ministers for net zero emissions by 2040 – Scottish Water will have a key role in delivering the green recovery in Scotland. Such a key role is entirely consistent with the sector vision, the challenge to deliver net zero emissions, and the expectation of customers that Scottish Water is resilient and can adapt to our changing climate.

Implications of the pandemic for SRC21

This draft determination takes account of the impacts of the factors noted above. In particular, the pandemic affects the analysis that we had used to derive the price cap ranges set out in Prospects for Prices. The following factors impacted our approach:

The impact on customers

It is already clear that the economic impact of the pandemic will lead to higher than expected levels of unemployment, poverty and business failures.

For household customers, this will impact on affordability and ability to pay in the short to medium term, and may, unfortunately, lead to increases in customer debt. We recognise that Scottish Water is currently receiving less aggregate charge income from household customers – but we are setting a cap on the total amount of charges for the next six years, not just for the next couple of years.

The Commission recognises that the Scottish Government may adopt measures to help customers pay their water charges in their Principles of Charges for the sector; for example, through the council tax reduction scheme. These mitigating measures are matters for the Scottish Government. That said, it becomes even more important that Scottish Water explains to its customers how it is delivering value for money.

Non-household customers are also being impacted by the pandemic. The lockdown has reduced non-household consumption. It has also affected some businesses’ ability to pay for the services they receive. The Commission recognises that some disruption to the retail market is likely, which may impact on wholesale revenues. There will undoubtedly be challenges for licensed providers who are expected to play an important role in supporting their customers through this pandemic. The Commission has acted separately to ensure that this effect is managed and limited¹³.

We therefore propose to continue to set default retail tariffs for the non-household retail market¹⁴. These tariffs are the maximum that any licensed provider can charge for a standard level of service. Any non-household customer has the right to require any licensed provider to offer the standard level of service for this default retail tariff. The Commission is proposing to establish the default retail tariff for each year that reflects Scottish Water’s proposals for non-household wholesale charges in its Scheme of Charges and offers the same percentage gross retail margin to the licensed providers as exists currently.

Scottish Water’s financial position

It is likely that Scottish Water may continue to incur additional costs associated with its response to the pandemic. These will include, for example, the costs associated with safeguarding operational staff, carrying out increased testing at wastewater treatment works, and ensuring resilience of supplies where demand has increased during lockdown.

We have reviewed the assumptions in Prospects for Prices concerning the amount of ‘Tier 1’ expenditure that Scottish Water will require over the regulatory control period¹⁵. We consider that the starting range for the regulatory period and the efficiency challenge remain reasonable, notwithstanding the current higher levels of operating costs that may be being incurred by Scottish Water.

Impact on the wider economy and growth

It is clear that the pandemic is having significant impacts on economies throughout the world, including Scotland. The IMF has predicted that the impact on world economies will be worse than the 2007 financial crash¹⁶.

We recognise that the assumptions we made before the pandemic on the rate of growth of household and non-household customers will have to be kept under review.

For that reason, we have allowed Scottish Water flexibility in how it utilises the cap on the total amount of charges. We now expect Scottish Water’s annual Scheme of Charges to draw on the national engagement programme that it has agreed with the Customer Forum.

Investment delivery

Prior to the pandemic¹⁷, we noted that Scottish Water was making good overall progress in delivering the 2015-21 investment programme. The requirement to suspend all non-essential project work during lockdown has inevitably introduced a significant delay in progress. Scottish Water reports that it will be some time before the full impact on delivery of the remainder of the 2015-21 programme is clear. It therefore appears inevitable that there will be a higher than expected ‘carry over’ of projects from the 2015-21 period into the next regulatory control period. At this stage, the extent of this carry over is unclear but it will impact on the profile of investment delivery during 2021-27.

There are also significant uncertainties related to the pandemic’s impact on Scottish Water’s supply chain and the associated costs of future capital works. For example, it appears likely that – at least in the short term – the additional measures associated with Covid-19 protection at site works will lead to higher costs and lower levels of productivity. This may lead to capital works cost inflation during the regulatory control period being higher than originally assumed. Other supply chain impacts could include higher costs associated with a reduction in the number of market participants and/or skill shortages associated with government stimulus measures – such as the infrastructure investment associated with the ‘green recovery’. We assume that any such increase in construction prices is typical of prices across the economy and is therefore reflected in the economy-wide inflation rate.

We have reviewed the level of capital expenditure that Scottish Water will need to incur to deliver the Ministers’ Objectives. The challenge for Scottish Water to maintain its levels of service and achieve net zero has certainly not reduced and may even have increased. This reflects the inevitable shortterm impacts on Scottish Water’s finances and capital programme delivery.

We consider that, despite the impact of the Covid-19 pandemic, our assessment of the overall level of capital expenditure that is required to meet the Ministers’ Objectives – as set out in our Investment Decision Paper of 2019 and in Prospects for Prices earlier this year – remains valid. Recognising that the pandemic has impacted on all parts of the economy, our draft determination requires Scottish Water to rise further to the challenges it faces and to manage the impact of the pandemic on its activities without asking its customers to pay even more than we identified as being required in our February paper.

The Commission therefore considers that it should set the total amount of charges to reflect the need for investment and for Tier 1 expenditure, minus the debt that Ministers have indicated may be available. This is on the basis that it is still reasonable to expect Scottish Water to achieve over time the £150m efficiency challenge in capital efficiency included in our assessment. In other words, the investment need has not changed and we are requiring Scottish Water to deliver that investment in line with our earlier analysis. And just to be clear, the Commission proposes to determine the maximum amount of charges that it should allow Scottish Water, recognising that this may require Scottish Water to make additional efficiencies in order to absorb any additional costs associated with the impact of the Covid-19 pandemic.

The impact on Scottish Water’s future funding

The Commission’s proposed maximum amount of charges for the regulatory control period allows Scottish Water as much flexibility as possible to address the impact of the Covid-19 pandemic and to position itself as well as possible to deliver the long-term challenges it faces. Against this backdrop, the Commission has also asked Scottish Water to ensure that its revenue in the final year of this regulatory control period is no less than £1,393m in 2018-19 prices¹⁸.

We consider that setting the maximum amount of charges over the whole regulatory control period should allow both the Scottish Government and Scottish Water to balance an appropriate response to the impacts of the pandemic with ensuring that customers’ interests over the medium and long term are protected.

The Scottish Ministers also asked that we consider the prospects for charges in the regulatory control period after 2027. Our analysis shows that, given the need to continue to transition to a long-term sustainable level of investment, charges will have to increase by a similar amount in real terms (by around 9-13%) over the next regulatory control period. This would involve a further real term increase of 28% in the overall size of the capital programme between 2021-27 and 2027-33.

Summary

In summary, the pandemic has had, and is likely to continue to have, material impacts on customers and the wider economy.

Perhaps most importantly, the crisis has brought into focus the need to ensure that infrastructure is resilient, properly maintained and able to cope with unexpected events, including the growing impact of climate change on Scottish Water’s operations. The pandemic has not changed the need to respond urgently to the target Ministers have set for Scottish Water to achieve net zero emissions by 2040. Scottish Water will also have a key role in implementing the Scottish Government’s call for a ‘green recovery’.

It therefore remains essential that Scottish Water has sufficient resources to deliver the full set of ministerial Objectives.

Determining the maximum amount of charges

Notwithstanding the considerable impact on customers and wider society of the pandemic, we can have confidence in the level of Tier 1 expenditure that Scottish Water will incur over the regulatory control period. Similarly, we can have confidence in the level of investment that Scottish Water is likely to have to commit if it is to deliver the ministerial Objectives in an economically optimal way. The cap on the total amount of charges reflects the total of this investment and the required Tier 1 expenditure, minus the debt that Ministers have indicated may be available.

The Commission’s approach is the same as for previous regulatory control periods. There has always been flexibility between years on the use of the maximum amount of charges allowed for in the Commission’s final determination; this has most recently been the case in the current period, where charges were agreed to be fixed in nominal terms for the first three years (at a rate that later proved to be above the rate of consumer price inflation). Charges increased by less than the rate of inflation in later years of the current regulatory control period such that the overall cap was met.

Setting a clear expectation for revenue at the end of the regulatory control period, and monitoring progress towards this target carefully, will allow for short-term flexibility in charges, while maintaining progress on the transition to a financially sustainable sector in the long term. It also provides a clear direction of travel to a sustainable level of investment in the industry.

We have allowed for an additional ring-fenced allowance of £133m of capital expenditure in the total amount of charges for the regulatory control period. This amount is to cover any additional costs that Scottish Water has incurred in selecting an option that has a higher risk-adjusted NPV after allowing for externalities such as carbon, natural and social capital than the lowest cash cost option (and this has been clearly demonstrated in an appraisal).

It will be for Scottish Water to advance its plans for charges in its annual Scheme of Charges for approval. The Commission expects that Scottish Water will take account of the actual economic conditions as Scottish Water experiences them. In this regard, the Commission regards the Customer Forum’s agreement with Scottish Water for there to be an on-going conversation with customers and communities about water services in general, and the future for charges in particular, as a significant positive development. In light of the agreement between the Customer Forum and Scottish Water, we have written to Scottish Water to request that they commence their national engagement programme as soon as possible (see Appendix 8). We expect that Scottish Water’s proposed Scheme of Charges for 2021-22 will reflect some early results of this engagement.

Our process of approval of Scottish Water’s annual Scheme of Charges will include an assessment of whether:

It reflects the results of the agreed national engagement programme with customers;
It is consistent with the allowed for cap on the total amount of charges; and
Scottish Water can explain how it is consistent with it achieving the level of revenue in 2027 that the Commission considers will ensure that future customers do not face paying a disproportionate share of achieving the desired level of service resilience and net zero emissions.

Scottish Water’s investment appraisals

We are clear that Scottish Water should make its investment decisions in an economically optimal way (thereby keeping bills as low as they can be for the long term). This means that the appraisal of options must take account of the costs of carbon over the life of an asset and the costs and benefits of natural and social capital and other externalities.

The move from taking investment decisions on the basis of lowest economic cost, to one in which choices are made on the basis of the most beneficial long-term outcomes including service, net zero, environment, amenity and economic terms, is a significant one for Scottish Water. It will require them to balance technical expertise with the expectations of customers, communities, regulators and other stakeholders. Scottish Water will need to assess and evaluate decisions in new ways, changing the approach of the organisation. This will take time to get right.

Putting customers at the heart of Scottish Water’s investment decisions will be a particular challenge, requiring insight into the needs and aspirations of their broad customer base. Further, Scottish Water must understand the views of communities on specific projects, being clear if there are additional benefits that can be secured.

For this reason, we have allowed for a ring-fenced allowance of £133m to be available to cover any additional costs that Scottish Water has incurred in selecting an option that has a higher risk-adjusted NPV after allowing for externalities such as carbon, natural and social capital than the lowest cash cost option. Scottish Water will only be able to access this allowance if it is clearly evidenced in an appraisal.

To draw down this funding for broader benefits, Scottish Water will need to demonstrate that it has understood and applied an understanding of the expectations of customers and communities, as well as those of regulators and other stakeholders, to their decisions. This will help meet its commitment to the Customer Forum that: ‘every decision made by Scottish Water should be the one it would take if the customer were in the room.’

With our partners in the Investment Planning and Prioritisation Group (IPPG), we will develop a mechanism for agreeing the drawdown of broader benefit funds. This could be in relation to individual projects, or as a programme of work. We will seek to ensure that this mechanism helps secure Scottish Water’s move to delivering the most beneficial long-term outcomes in an efficient manner, without placing unnecessary hurdles in the investment decision-making process.

This reliance on appraisals will also require Scottish Water to improve its analytical capability and its use of asset information in making its decisions. This will be vital if Scottish Water is to be able to rise to the challenge of making all of its decisions robustly and in an appropriately customer-centric fashion.

Scottish Water’s Transformation Plan

As part of this draft determination, we are again setting out our expectations in relation to the move by Scottish Water to an EBP approach, and the major transformation within the organisation this entails.

We provided extensive material in relation to EBR and EBP in Prospects for Prices, including our expectations of what would be required of Scottish Water. It is critical that the transformation within Scottish Water that EBP requires is appropriately developed and implemented during the course of this regulatory control period.

The onus is now on Scottish Water to explain and to deliver, and to demonstrate to all of its stakeholders that it is operating effectively and efficiently. In particular, there is an opportunity for Scottish Water to show leadership in explaining the need for increased investment, and therefore charges.

Prospects for Prices stated the Commission’s expectation that Scottish Water should develop a Transformation Plan of its organisation and activities, and should provide evidence of its progress in order to maintain the trust and confidence of its customers and communities. This draft determination reiterates that expectation.

The Commission is clear that Scottish Water should take ownership of its future strategy and explain its needs and the potential choices available to its customers. In particular, we expect Scottish Water to:

take full ownership of enduring relationships with the customers and communities it serves;
promote an open discussion of its purpose, aspirations and values;
set out clearly – and in a way that is accessible to all – its current performance and plans for improvement;
engage in regular and frank discussion of performance, recognising that performance expectations will always change and become more demanding;
adopt a collaborative, timely and pro-active approach to meeting the needs and aspirations of its regulators, aiming to address their concerns even before they have had to ask; and
embrace these challenges as an opportunity – and be seen to do so in a positive and constructive way.

At the same time the Commission is clear that it has an important role to be reasonable but frank in judging and evidencing its assessment of performance. It will support, where the evidence is good, Scottish Water’s plans for meeting the expectations of the customers and communities that it serves.

Next steps

We are now publishing our draft determination for consultation, and we welcome comments from all stakeholders.

Please email your views to: draftrepresentation@watercommission.co.uk.

Representations should be submitted to us on or before 19 November 2020. All representations will be published by us, unless respondents request otherwise.

We will take account of any representations made by 19 November 2020, ahead of publishing our final determination on 10 December 2020.

Scottish Water will then need to decide whether or not it will accept the final determination by 8 February 2021. It will publish its Scheme of Charges for 2021-22 before the end of February 2021.

This Strategic Review of Charges and draft determination mark only the beginning of the transformative journey required to transition to a sustainable sector. As such, and given the progress to date, we have set out here our initial timetable for future action and the next price review (SRC27).

This will include an assessment of Scottish Water’s progress in delivering the requirements set out in our determination. The extent of Scottish Water’s progress will have a direct bearing on our approach to SRC27.

Milestones	Provisional dates
Developing our approach for SRC27	From the first half of 2022
Methodology	Publish spring 2024
Information/consultation papers published	From summer 2024 until early 2026
Draft determination	End of May 2026
Final determination	Beginning of September 2026

⁶ The 16% difference is based on the average increase in England and Wales divided by the reduction in Scotland. This is calculated as ((1 + 4%)/(1 – 10%)) – 1.

⁷ We are using the term embodied here to represent the carbon dioxide or greenhouse gas emissions associated with the manufacture and uses of a product or service. We take this term to be wider than the term ‘embedded’ as it allows for the consideration in decision taking of the implications of potential asset decommissioning.

⁸ Recent events such as the major disruption to the rail network following extreme weather or the Finsbury Park flooding give some indication as to how much we take our infrastructure for granted. The recent Genoa bridge collapse shows the catastrophic impact of a critical asset failure.

⁹ See Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Compliance and Ethics by Professor Christopher Hodges. Published by Hart and Beck 2015 and Ethical Business Practice and Regulation by C Hodges and R Steinholtz. Published by Hart and Beck 2017.

¹⁰ The Research Co-ordination group comprised representatives from the key sector stakeholders including Scottish Government, Customer Forum, Scottish Water, CAS, SEPA and DWQR.

¹¹ https://www.gov.scot/news/working-towards-economic-recovery/

¹² https://infrastructurecommission.scot/storage/276/Phase2_Delivery_Findings_Report.pdf

¹³ For further information see the Commission’s Press Release on the water charge relief scheme for business customers, dated 14 May 2020.

¹⁴ The non-household market is not part of Scottish Water’s core (regulated) activity. The Commission licences organisations that want to act as retail suppliers, buying services at the wholesale charges set out by Scottish Water in its annual Scheme of Charges and selling these services to non-household customers in competition with other licensed providers.

¹⁵ ‘Tier 1’ refers to Scottish Water’s recurring costs such as operating costs, interest payments, the cost of the legacy PFI contracts, an allowance for reactive repair of assets and payments to developers for connecting new properties.

¹⁶ https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

¹⁷ https://wics.scot/publications/scottish-water/performance/scottish-water-performance-report-2018-19

¹⁸ As outlined above, allowed for revenues are presented in the same price base as revenues reported in the charging year 2018-2019. This is based on Consumer Price Index (CPI) inflation reported in October of the previous financial year. This allows for a like-for-like comparison to Scottish Water’s reported revenues of £1,217m in 2018-19.

2021-27 Draft Determination