I have pleasure in introducing the Commission’s Strategic Review of Charges, which includes our draft determination of the maximum amount of charges we propose to allow Scottish Water to raise from its customers. As previously, we have set the maximum amount of charges that Scottish Water can levy on its customers relative to the Consumer Price Inflation index (CPI). This maximum amount of charges reflects our analysis of the lowest reasonable overall cost that Scottish Water will incur in meeting the draft Objectives that the Scottish Ministers have set.
The Strategic Review also outlines our expectations for this, and future, regulatory control periods. This Strategic Review begins a process of increasing investment to the level required to maintain and replace assets in an economically optimal way (taking account of carbon, circular economy considerations, natural and social capital). I recognise that my office has an important role in ensuring that Scottish Water continues to improve its efficiency, delivers sustainable levels of service, and more than meets the expectations of the customers and communities it serves. The proposed maximum amount of charges is designed to make sure that customers continue to see the benefit of a well-managed, sustainable water sector.
The sector in Scotland has come a long way since Scottish Water was created in 2002. The Commission’s targets to reduce operating expenditure have resulted in Scottish Water’s average bills being around 20% lower than they would otherwise have been. And this does not take account of Scottish Water’s improved capital expenditure effectiveness and efficiency. Levels of service have also increased markedly during this time.
My office and I will continue to challenge Scottish Water to spend every pound wisely. As Scottish Water is publicly owned, every pound it raises will benefit the customers and communities it serves.
In spite of the improvements to date there is no room for complacency. Current generations have benefited from the prudent investment of previous generations. Scottish Water is playing its part by becoming ever more efficient in improving the way it manages its assets. Scotland has invested more per person per year than any other part of the United Kingdom since 2002 (£135 compared with around £105). Even so, the focus to date has had to be on improving services while keeping the assets ‘ticking over’. As a result, many of Scottish Water’s assets, such as pipes and sewers, have had their lives prolonged rather than being renewed. Although this has meant lower bills in recent years, the Scottish water industry is now at something of a crossroads.
The recent gains in performance could all too easily be lost if we do not continue to invest. Although Scotland has invested more and currently enjoys a much improved level of service, we still face a challenge – in both the short and the long term – to maintain service levels, given that there is an ageing asset base and a changing climate. If we do not invest sufficiently today there is a risk that we slide backwards. This investment will mean that bills have to go up although the increases over the next six years will still mean customers and communities are paying broadly the same in real terms as they were in 2002. But delay would risk even higher bills, reduce service reliability and water quality, and result in a failure to meet the net zero target. Borrowing more now will simply lead to higher bills in future. That would be poor value for both current and future customers.
My office and I wholeheartedly support the vision for the water sector that the Cabinet Secretary for Environment, Climate Change and Land Reform outlined in June 2019. If Scotland is to achieve this vision, the sector will need to embrace the fundamental changes required to achieve the target of net zero emissions by 2040 that Ministers have set.
Scottish Water will have to transform its business in a radical way if it is to meet the long-term challenges it faces, by driving further efficiencies, by ensuring that levels of service are maintained, and by bringing a new focus on the wider costs and benefits of its activities.
This draft determination ensures that Scottish Water has the opportunity to deliver its part in achieving the sector vision. The draft determination is the product of extensive discussion, research and analysis, including detailed engagement with customer representatives and other stakeholders. The process also continues to be peer reviewed by the OECD. The OECD will publish the results of its peer review during 2021. Since the Strategic Review process was initiated in 2017, my office and I have adopted a transparent and staged approach, listening to and working jointly with our wide-ranging stakeholders and publishing 23 Decision Papers that clearly explained our evolving approach.
We published the last of these Decision Papers in February 2020, setting out our view of the prospects for prices in the next, and subsequent, regulatory periods. Much has changed since then. The Covid-19 pandemic has brought major disruption, not only to Scottish Water and the wider water sector, but also to every business and household in Scotland. There are inevitable impacts on Scottish Water’s finances and on its capital programme delivery. Our draft determination acknowledges these impacts but requires Scottish Water to manage them effectively and efficiently. The challenge that Scottish Water faces – to maintain its levels of service and achieve net zero – has therefore increased from that which was set in February. The investment challenge remains.
We have sought to take account of the impact of the pandemic in our draft determination by maximising the scope for flexibility in how the Scottish Government and Scottish Water can respond. We have done so by setting average annual caps on Scottish Water’s charges, whilst recognising that it should have flexibility in how it utilises the cap on total charges during the regulatory control period from 2021-27. We have also set an indicative cap on the future total amount of charges that Scottish Water may need to raise from its customers in the subsequent regulatory control period 2027-33.
The total amount of charges is arrived at after having allowed for the increased investment necessary to meet the Scottish Ministers’ Objectives for this regulatory control period.
These Objectives require Scottish Water to ensure the ongoing resilience of services and improvements in water quality and environmental performance in a way that is consistent with the Scottish Ministers’ Statement on the Principles of Charging for the period.
My office and I have encouraged Scottish Water to think differently about how it meets future challenges, and to embrace stretching efficiency targets. Taking prudent decisions now will ensure that both current customers and those of future generations can look forward to high-quality water and sewerage services delivered at the lowest reasonable overall cost. We are clear that customers are best served by making steady but decisive progress in meeting these challenges. This reduces the risk of unpleasant surprises in future – whether in relation to charges, levels of service or environmental performance.
The draft determination is underpinned by the expectation that Scottish Water will undergo the fundamental transformation necessary if it is to deliver the long-term vision set out in its Strategic Plan. Scottish Water should continually seek to deliver at a level that exceeds the expectations of its regulators and the customers and communities it serves. The onus is now on Scottish Water to evidence that everything it does is for the benefit of customers (both now and in the long term) and fully to justify its investment needs.
My office and I would like to recognise Scottish Water’s success to date in managing the risks where assets are coming to the end of their lives, thereby postponing investment for as long as possible. Looking forward, however, it is evident that Scottish Water cannot reasonably be expected to extend further average asset lives. Scottish Water has now to begin to invest much more in maintaining and replacing its assets.
While committing the required investment brings with it a clear cost, it is equally the case that customers would experience a significant cost in deteriorating levels of service if this investment is not made in a timely manner. This investment is also likely to be critical to the achievement of Scottish Water’s net zero emissions target.
It should be noted, however, that allowing for increased investment does not mean there is a blank cheque. Rather, we expect Scottish Water to demonstrate how it is continuing to drive efficiency and to improve its risk management.
The draft determination takes full account of the agreement that has been reached between the Customer Forum and Scottish Water. In particular, we welcome the commitment by Scottish Water to work with customers and communities to identify the levels of service and price profile they consider reasonable. We also very much welcome the concept that Scottish Water should take all of its investment decisions as if an active customer voice were in the room.
We would like to thank the Customer Forum for their significant contribution and for ensuring that the customer voice has been at the heart of the Strategic Review process.
The next phase of the process is for stakeholders to provide their feedback on the proposals in this document. We welcome any comments and will publish our Final Determination on 10 December 2020.
In closing, I would like to take this opportunity to recognise Scottish Water’s efforts in ensuring that we have all been able to count on a continuous supply of highquality drinking water and the safe disposal of our wastewater throughout the ongoing Covid-19 pandemic. With hand washing a major line of defence against the virus, the essential importance of a reliable supply of water has never been so clear.
I would also like to thank the many other individuals and organisations who have contributed to the Strategic Review process to date, and to thank my staff for their work in providing the robust analysis that underpins these proposals.
Alan D A Sutherland
8 October 2020