This final determination is the culmination of over four years of research, analysis and discussion with stakeholders. Much has changed since we began our work.
- The United Kingdom has left the European Union; but the Scottish Ministers have indicated an intention to continue to mirror closely the water quality and environmental standards that are in place in the European Union.
- The Scottish Government has declared a global climate emergency and has signed into statute a net zero emissions target by 2045 for all sectors in Scotland. Scottish Water has been set the target of achieving net zero emissions by 2040.
- Covid-19 is the most serious public health crisis in a century. The response is having a major impact on our economy, affecting both households and businesses. The pandemic has brought a renewed focus on the resilience of our public services.
In setting our final determination, the Commission is very mindful of the economic disruption that has been wrought by the pandemic and by the potential impact of our exit from the European Union. However, the Commission is also acutely aware of just how reliant we are on our water service and the long-term impacts that under-investment in the industry would have for future generations.
We welcome the Scottish Government’s initiative to increase the extent of discounts available to households through the Water Charge Reduction Scheme. We have also been working with the Scottish Government and other stakeholders on measures to assist nonhousehold customers. These measures include the suspension of the requirement for retailers to pre-pay Scottish Water and the opportunity for businesses to defer payment of their charges with no penalty or interest charge. We have recently extended this deferral scheme and suspension of pre-payment until the end of February 20211. We are committed to working with the Scottish Government, Scottish Water and the retailers in determining when and how the unwinding of these initiatives is pursued.
We have also recently agreed our Corporate Plan and budget for the next regulatory control period with the Scottish Government. This plan sets out how we will regulate Scottish Water and hold it to account while meeting our statutory duties in inspiring a Hydro Nation. We appreciate the stretching efficiency target that is asked of Scottish Water and, as such, our Corporate Plan includes an increase in our own budget by less than the rate of inflation.
As a result of our efficiency and the international income that we have been able to generate during this regulatory control period, we will be able to return over £1.5m to Scottish Water and retailers.
The final Objectives of the Scottish Ministers require Scottish Water to ensure the ongoing resilience of services and improvements in water quality and environmental performance. These Objectives include the ambitious and far-sighted vision for the industry and charge Scottish Water with making progress towards achieving net zero emissions (on both an operational and an embodied2 basis) by 2040. Achieving net zero emissions will require Scottish Water to manage effectively its huge asset base, replacing assets at the right time, and taking account of the need to maintain levels of service while also recognising environmental impacts and the need to keep costs low.
Scottish Water’s assets are substantial, with a replacement value of some £70 billion. This equates to some £30,000 for every household in Scotland (compared to the average household bill of less than £400 a year).
The Commission’s role is to ensure that charges reflect the lowest reasonable overall cost for Scottish Water to deliver the Scottish Ministers’ Objectives in a manner that is consistent with the Scottish Ministers’ Statement of the Principles of Charging. Our work with Scottish Water and our independent analysis, as set out in our draft determination, has made it clear that there will have to be a significant uplift in the level of annual investment if Scottish Water is to deliver these Objectives and to realise the long-term Industry Vision.3
This final determination now establishes the maximum amount of charges that Scottish Water can levy during the six-year regulatory control period 2021-27.
It follows publication in October 2020 of our draft determination, in which we sought the views of all individuals and stakeholders with an interest in the water sector in Scotland on our proposals. The final determination takes into account both the responses we received on the draft determination and the finalisation of the Scottish Ministers’ policy for the industry over the forthcoming regulatory control period.
The Scottish Ministers’ policy framework for the industry is set out in their Principles of Charging and Objectives.4
Measures to assist customers
Our draft determination explained that Scotland faces a challenge to maintain service levels, given that the pipes, treatment works and other assets that provide our water and sewerage services are ageing. It also set out how we have to respond to a changing climate, and why we have to invest more, beginning now, if we are to mitigate the risk that service levels slide backwards.
Our draft determination noted that this increase in investment means that bills will have to go up, although not by so much that customers and communities would be paying more in real terms than they were in 2002-03. We explained that delaying the investment would risk even higher bills, reduce service reliability and water quality, and result in a failure to meet the net zero target. Furthermore, borrowing more on an ongoing basis, would simply lead to higher bills in future, which would represent poor value for both current and future customers.
In the draft determination we recognised the financial difficulties that many customers and businesses were facing, and have continued to face, as a result of the Covid-19 pandemic. As noted earlier, we are pleased that the Scottish Government has increased the discount that will be available through the water charges reduction scheme to 35%. This means that charges for those receiving the full discount will increase at less than the rate of inflation over the 2021-27 regulatory control period. We have also noted that the measures put in place to assist non-household customers will be extended.
In our draft determination, we sought to maximise Scottish Water’s scope for flexibility in preparing its annual Scheme of Charges, and in the phasing in of any price increases. This flexibility has been retained as a key element of the final determination. Scottish Water has stated that it is committed to engaging directly with customers through its national conversation. Indeed, we are pleased to note that Scottish Water has already begun a programme of research into customers’ views of price levels next year (2021-22) given the impacts of the Covid-19 pandemic. We expect Scottish Water’s proposed Scheme of Charges for 2021/22 to be supported by evidence from this research.
To ensure that charges are kept as low as possible, we have set stretching annual efficiency targets for Scottish Water for the forthcoming regulatory control period. We expect Scottish Water to reduce its tier one costs (that is, its operating, interest, PPP and reactive repair costs) by 1% each year in real terms. Given that the PPP costs increase in line with the contracts, this efficiency challenge is greater than is faced by the private water and sewerage companies south of the border.
Ensuring a transparent process
This final determination has been the result of our most open and collaborative Strategic Review process to date. Our thinking began many months before the publication of our methodology document in April 2017. We published further refinements and clarifications to this methodology towards the end of 2018. Through the publication of a series of 23 Decision Papers, we have set out our views on material aspects of the Strategic Review.
Stakeholders were consulted at every stage and this engagement was underpinned by robust analysis and by an extensive programme of customer research overseen by the Research Co-ordination Group (which comprised representatives from the key sector stakeholders including Scottish Government, Customer Forum, Scottish Water, Consumer Advice Scotland (CAS), the Scottish Environment Protection Agency (SEPA) and the Drinking Water Quality Regulator (DWQR)).
This consultative approach has, we believe, resulted in a significantly better outcome for customers and communities. In particular, we were very pleased that the Customer Forum reached an agreement with Scottish Water that will ensure that customer and community views are at the heart of future decision-making.
Given the importance of the proposals for the long-term future of the industry we set out to ensure that we engaged extensively around our draft determination. We sent electronic copies directly to more than 800 individuals and organisations, and promoted the key messages of the draft determination more widely through articles in magazines and newspapers and through short videos on social media. This reflected our view that we all have a stake in ensuring the long-term future of our water and sewerage services.
We would like to take this opportunity to thank all those who provided feedback on the proposals in the draft determination.
We have carefully considered these responses and taken account of the points made in reaching our final determination. An overview of the issues raised is provided further below in this document, and all of the responses are available on our website.
Finally, we see the final determination as an important staging point in the journey that the Scottish water sector is on. It is critical that the strong and open dialogue we have had to date continues. We welcome the dialogue that Scottish Water will have with its customers and communities through its national conversation. For our part, we will continue to work closely and collaboratively with all stakeholders throughout this coming regulatory control period.
1 Letter on Measure in Response to Covid-19_1.pdf (watercommission.co.uk)
2 We are using the term embodied here to represent the carbon dioxide or greenhouse gas emissions associated with the manufacture and use 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.