The following section sets out the Water Industry Commission for Scotland’s final determination of charges under the Water Industry (Scotland) Act 2002. This final determination establishes the maximum amount of charges that Scottish Water may levy on its customers.
The final determination of charges reflects the Water Industry Commission for Scotland’s view of the lowest reasonable overall cost that Scottish Water should incur in meeting the Objectives set by the Scottish Ministers in a manner fully consistent with the Scottish Ministers’ Final Statement on the Principles of Charging.
“During the regulatory control period, 2021 to 2027, the maximum amount of Scottish Water’s charges is limited to £8,024m.5 Supported by an increase in government borrowing to £1,030m, Scottish Water will be able to invest just over £4,500m before 2027. This will represent an increase of £1,095m (around 30%) from the allowed-for investment in the 2015-21 regulatory control period.”
We have included a £150m capital efficiency challenge in our assessment of the long-term sustainable level of investment. The maximum amount of charges that Scottish Water can levy on its customers is set at CPI+2% on average for each year of the regulatory control period.
The charges cap includes a demanding 1% real efficiency challenge year-on-year in the allowed-for ‘Tier 1’ expenditure (which covers PFI costs, interest, operating costs and reactive asset maintenance investment).
For the first time, it also includes a ring-fenced allowance of £132m to cover any additional costs that Scottish Water has incurred in selecting an option that has a higher net present value (NPV) than the lowest financial cost option, after allowing for externalities such as carbon, natural and social capital. Scottish Water will only be able to access this ring-fenced allowance if these additional costs and benefits are clearly evidenced in an appraisal.
Scottish Water must propose charges in its Annual Scheme of Charges that are consistent with this average annual cap and the cumulative application of this cap.6 The Commission is willing to consider any Charges Scheme that could be consistent with the overall cap on the amount of charges that can be levied on customers during the 2021-27 regulatory control period.
The Commission has a statutory duty to promote the interests of customers and, in so doing, have regard to the interests of future customers. As such, within this final determination, the Commission would expect that its charge caps would allow Scottish Water’s annual revenue in the final year of the current regulatory control period 2026-27 to be no less than £1,392m.7
This level of revenue is consistent with ensuring that future generations of customers are not disproportionately impacted by the costs of both achieving net zero emissions and of replacing a backlog of worn-out assets (with their associated additional emissions). By ensuring such a transition in revenue, Scottish Water is looking after its future customers and ensuring that levels of service to current customers are not compromised.
We would expect around 70% of the total income from customers over the regulatory control period to come from households, with the remainder coming from non-household customers. This is our expectation based on our analysis of the historic costs incurred in serving household and non-household customers. The Commission will carry out further work with Scottish Water and other stakeholders to review relative cost allocations between household and non-household customers, should Scottish Water consider that new evidence is available and that the current allocation is no longer broadly cost reflective.
In addition, the Scottish Government has made available new borrowing of £1,030m to support the delivery of improved outcomes for customers. This is an increase from the previous period of over £300m.
5 The revenue figures provided in the document are in 2018-19 prices while, for comparison purposes, investment figures are provided in 2017-18 prices.
6 Scottish Water could propose a higher charge cap in any one year. Provided that the Commission understood the rationale, the customer interest and how this would be consistent with this final determination, such a higher increase could be approved. 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.
7 The revenue figures provided in the document are in 2018-19 prices while, for comparison purposes, investment figures are provided in 2017-18 prices.