There have been a number of developments since we published our draft determination, particularly in relation to additional assistance for water and sewerage customers. These developments, along with the consultation responses we received on our draft determination, have been taken into account in the final determination.
We received 11 responses to the draft determination from stakeholders and members of the public. We reviewed each response carefully and the main emerging themes are outlined below. All of the responses are published in full on our website: Consultation Responses.
A number of the responses recognised that there was a need for increased investment to meet the future challenges that Scottish Water faces, and that this would need to be appropriately funded. There was general support for Scottish Water’s transition to net zero emissions by 2040.
One respondent noted that increased investment could involve increased consumption of natural resources, and it will be important to ensure that Scottish Water takes a sustainable approach to investment delivery.
There was positive endorsement of the inclusion of social, natural and financial capital when appraising and prioritising investment. In addition, the proposal to establish a ring-fenced allowance to help accelerate the transition to the inclusion of natural and social capital in decision making was welcomed, although it was noted that it would be beneficial if there were greater clarity about how the allowance would be used. We have set out below further details in respect of this allowance.
Several respondents raised concerns about the affordability of charge increases for households and businesses, particularly in light of the financial impact of the Covid-19 pandemic. We understand these concerns and are pleased to note that the Scottish Government is providing greater protection to those least able to afford water charges through the changes announced to the water charges reduction scheme. We have also set out elsewhere in this document the measures currently in place, and now being extended, to assist businesses at this difficult time.8
One respondent highlighted ongoing local service issues and questioned the need for price increases. In preparing a Strategic Review of Charges, we carefully review performance and identify areas for improvement. Investment prioritisation was one obvious such area. The investment prioritisation process introduced for the next regulatory period should help ensure priority service issues are addressed. Our draft determination set out the case for increased prices, based on an analysis of the investment required to meet the Objectives set by Ministers.
The respondent also sought more oversight of Scottish Water’s operations and an interim review of their performance in delivering the determination. The draft determination set out our approach to ensuring that Scottish Water provide open and transparent reporting of their performance and we will be monitoring this carefully. As discussed later in this document, the methodology for the next price review will be developed before the mid-point of this regulatory control period in 2023. The development of a methodology for a future Strategic Review of Charges requires a careful assessment of Scottish Water’s initial performance in delivering this determination.
One respondent felt that the transition to net zero should be funded by government rather than water charge payers. In this regard, we would note that Ministers’ Principles of Charging, which set the charging policy for the industry, are clear that the cost of delivering Ministers’ Objectives should be recovered from the customer base, with support from government borrowing.
We have also received feedback that it was not sufficiently clear from the draft determination whether or not charges could be higher than the cap in some years. We want to clarify that the CPI+2% charge cap is the annual average over the period9. It is for Scottish Water to decide how to phase charge levels, based on the outcome of their national conversation.
One respondent raised the issue of a lack of support provided by Scottish Water for communities seeking improvement in private water and sewage supplies. Although private supplies do not fall within our statutory remit, we recognise the need for cost effective provision of services to rural communities and note the requirement on Scottish Water to support the Scottish Government’s objective of ensuring reliable and sustainable rural waste and water services.
Respondents were supportive of the view that Scottish Water needs to undergo a major transformation in its business, although the point was also made that this should not prevent Scottish Water from making timely progress in addressing investment needs. In terms of the general regulatory framework respondents were supportive of the move to Ethical Business Regulation and Ethical Business Practice, indicating that there is more work to be done to embed this approach further.
Final Objectives and Principles of Charging
Turning now to other developments since the draft determination, the Scottish Government published its Principles of Charging and Final Objectives for the sector on 7 December. Importantly, the Principles of Charging indicated an increase in the discount that is available through the water charges reduction scheme to 35%.
The Scottish Government has also broadened the coverage available so that more customers will be eligible for this assistance. This means that charges for those in receipt of the full support will see price increases below inflation over the 2021-27 period.
Scottish Water’s customer engagement on phasing of charges
As our draft determination explained, we have sought to maximise Scottish Water’s scope for flexibility in preparing its annual Scheme of Charges. In this regard, we welcome Scottish Water’s commitment to engaging directly with customers through a national conversation as part of its annual Scheme of Charges proposals.
We also understand that Scottish Water has already started research into customers’ views of price levels for next year (2021-22), taking account of the inevitable impacts of the Covid-19 pandemic.
Clarification of the ring-fenced fund
Our draft determination proposed that there should be a ring-fenced fund of £133m (now finalised as £132m) to enable Scottish Water to evidence where it has incurred additional costs in selecting an option that has a higher NPV than the lowest financial cost option, after allowing for externalities such as carbon, natural and social capital. Following the draft determination, it became clear that it would be helpful to clarify further the nature and purpose of the fund.
Our discussions with SEPA confirmed that the fund’s objective (that decisions should consider all relevant capitals – such as natural, social and financial capitals) is aligned with SEPA’s ‘One Planet Prosperity’ strategy. Indeed, the primary aim of the ring-fenced fund is to provide a further incentive for Scottish Water’s asset managers to make the paradigm shift towards making the best decisions for One Planet Prosperity over the long term.
Both SEPA and the Commission recognise that delivering Scotland’s water sector vision and Scottish Water’s Strategic Plan will require Scottish Water to make informed, effective and evidenced decisions on their investment choices.
These decisions must consistently strike the right balance for a flourishing Scotland, by considering environmental, social and financial costs and benefits – ultimately through full and well evidenced quantification. We expect Scottish Water to demonstrate its progress in this area well before we publish our methodology for the next Strategic Review of Charges.
We recognise that changing both the decision-making processes and the cultural practice within Scottish Water (and its delivery partners) will require a major transformation. As with any such transformation, this will take time to implement fully. We have recently written a joint letter with SEPA to Scottish Water confirming our expectations and the role of the ring-fenced allowance in supporting this transformation (see Appendix 1).
Financial modelling changes since the draft determination
There have been a number of minor changes to the financial parameters that we use in setting our charges.
- The extension of the water charges reduction scheme noted above will reduce Scottish Water’s revenue by just over £80m over the regulatory control period. Based on the previous draft of the Principles of Charging, we had allowed for half of this reduction in revenue in our draft determination.
- We now know that the inflation rate for October’s Consumer Price Index that will be used in setting prices for the 2021-22 financial year is 0.7%.
- The Scottish Government has increased the borrowing it will make available to Scottish Water by £10m to £1,030m.
- Since the draft determination, Scottish Water has reported its financial performance for 2019-20. We have therefore updated our forecast of Scottish Water’s annual revenue for 2020-21 based on this more recent information. We recognise that some uncertainty remains as to the rate at which the household and non-household customer base may change during the regulatory control period so will continue to monitor this carefully.
Our analysis indicates that the combined effect of these changes is such that the allowed level of investment for the 2021-27 regulatory control period can be maintained at £4,507m10 and the maximum amount of charges that Scottish Water can levy on its customers can remain at CPI+2% on average for each year of the regulatory control period11. We have reduced the level of revenue that we would expect Scottish Water to achieve by the 2026-27 financial year by £1m to £1,433m.12
8 Letter on Measure in Response to Covid-19_1.pdf (watercommission.co.uk)
9 Scottish Water’s Scheme of Charges will have to reflect changes in the customer base from the modelling assumptions used for this determination. These assumptions are unchanged from our February 2020 decision paper.
10 The revenue figures provided in the document are in 2018-19 prices while, for comparison purposes, investment figures are provided in 2017-18 prices.
11 Scottish Water’s Scheme of Charges will have to reflect changes in the customer base from the modelling assumptions used for this determination. These assumptions are unchanged from our February 2020 decision paper.
12 The revenue figures provided in the document are in 2018-19 prices while, for comparison purposes, investment figures are provided in 2017-18 prices