Overview
INTRODUCTION
Water is a precious resource, essential for both life and our economy. As a society, we rely on Scottish Water to deliver clean, high-quality drinking water at the turn of a tap, responsibly collect and treat wastewater and surface water, and return it to the environment without detriment – all while ensuring these services remain affordable.
The people of Scotland have benefitted considerably from a model where Scottish Water is publicly owned, commercially run and subject to rigorous independent economic regulation. As a result, water charges in Scotland remain among the lowest in the UK, while Scottish Water has invested the most per person since 2002. This investment has enabled Scottish Water to make significant improvements in the levels of service it provides. Scottish Water is among the top-ranking companies in Scotland on customer service, as measured by the UK Customer Satisfaction Index (UKCSI) , and it outperforms the average UKCSI for the water sector across the UK.
As economic regulator we play a key role in ensuring that Scottish Water delivers for the people of Scotland. One of the ways we fulfil this role is by setting caps on Scottish Water’s charges through a process known as the Strategic Review of Charges. Through this process, we make sure that customers pay no more than is necessary for essential water and wastewater services. We carefully monitor and report on Scottish Water’s performance and investment to ensure it is efficient and effective in delivering high-quality services now and for years to come.
Looking ahead, our approach for the Strategic Review of Charges which covers the six-year period 2027-33 (SRC27) will create a framework from which Scottish Water can continue to improve and make progress delivering against key challenges. It will focus on:
- Maintaining high standards of service and reliability
- Improving the evidence and analysis which supports decision-making
- Investing for a sustainable industry at lowest reasonable overall cost
- Placing customers at the heart of decision-making
This final methodology sets out the direction of travel for Scottish Water to make further progress on the journey towards delivering the water sector vision and ensuring the industry is sustainable for generations of customers to come.
As in 2021-27, our approach is underpinned by the principles of Ethical Business Practice and Regulation (EBP&R) which will continue to support open and frank conversations about industry challenges and the best ways to address them.
We look forward to working closely with Scottish Water, SEPA, DWQR, Consumer Scotland and other stakeholders throughout this Strategic Review of Charges.
This overview sets out the high-level principles and proposals contained within our detailed methodology document.
THE STRATEGIC REVIEW OF CHARGES
Every six years, we examine the resources that Scottish Water needs to provide high-quality water and sewerage services both now and into the future, ensuring that as a sector we can adapt and evolve to the challenges and uncertainty of climate change. We do this by determining the level of revenue Scottish Water must collect through charges to deliver the Objectives set for it by Scottish Ministers.
After analysing Scottish Water’s costs and efficiency, we set a cap on the charges it can collect from customers over a six-year regulatory control period. This process is known as the Strategic Review of Charges. Our Strategic Review of Charges involves working closely with other organisations in the water industry to ensure that the charge caps we set allow Scottish Water to deliver the environmental, water quality and service objectives set by the Scottish Ministers.
At an early stage of the Strategic Review of Charges we set out how we will set charge caps and a detailed timeline in line with the requirements set by Ministers in the Commissioning letter. The document outlining our approach is known as our methodology.
In developing our methodology for SRC27, we consider our regulatory approach and where there are opportunities to strengthen the model. This involves reviewing our approach in previous Strategic Review of Charges and building on the elements that worked well, ensuring that we are looking to the future and helping to deliver maximum benefits for Scotland’s water customers.
We consulted on our draft methodology proposals in August 2024. We have carefully considered the feedback we received from stakeholders. Since publishing our draft methodology, we have also continued developing various aspects of our methodology with Scottish Water and other stakeholders. This document sets out our finalised methodology for SRC27, reflecting the outcome of the consultation and our work with stakeholders following the publication of the draft methodology.
OUR REGULATORY APPROACH
Our process to determine charges for the regulatory control period covered by the Strategic Review of Charges 2021-27 (SRC21) concluded with the publication of our Final Determination in December 2020. We adopted the principles of EBP&R, which requires candour and transparency in all communications between regulator and regulated company. This approach facilitated open and honest discussions about the long-term challenges the industry faces and how to address them.
Our SRC21 regulatory approach emphasised the importance of working together to tackle industry challenges, such as delivering net zero emissions by 2040 and investing to replace Scottish Water’s ageing assets. This review represented an important step in moving away from the short-term thinking inherent in traditional regulatory models towards working together to deliver the best outcomes for Scotland’s current and future customers. It provided Scottish Water with a high degree of flexibility in its investment planning, since it was in customers’ interests to reduce the regulatory barriers to collaboration and innovation: two key elements of tackling these long-term challenges. It was one of our most collaborative Strategic Review of Charges to date and paved the way for the first joint water sector vision.
The Water Sector Vision |
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The importance of adopting a more flexible regulatory framework was highlighted during the early years of the 2021-27 regulatory control period. At this time, the UK experienced a period of high inflation and the cost-of-living crisis that arose from the COVID-19 pandemic and geopolitical factors. The regulatory framework enabled Scottish Water to respond by reprofiling charges and investment to ease the financial pressures on individuals and families across Scotland.
In our approach for 2021-27, we recognised the additional pressure climate change is placing on our essential services. Moving towards the next regulatory control period, it will be important to ensure that the water industry continues to adapt to climate change, while recognising these challenging economic times. It will be essential for Scottish Water to evidence the investment it requires and play its part in improving efficiency, to reduce the impact on customer charges. We also need to ensure there is clarity over what Scottish Water will deliver, when and at what cost to ensure that customers receive the benefits they have paid for.
OUR APPROACH FOR SRC27
Recognising these key long-term challenges, the Scottish Government is currently developing policy that will determine the guiding principles for the water industry as it addresses longer-term challenges including climate change adaptation and mitigation. The policy work focuses on equipping the water industry with the necessary tools and legislation to ensure that essential water, wastewater and drainage services can continue to be provided in a changing climate.
Through this policy development work, the Scottish Government has consulted on principles that will underpin the water industry’s approach to providing water, wastewater, and drainage services for decades to come. The Strategic Review of Charges 2027-33 will be an important step towards responding to these longer-term challenges in line with the policy principles, and our proposed approach reflects this.
The publication of this methodology is an important first step in the Strategic Review process. It represents the next phase of the journey towards ensuring the Scottish water industry is equipped to face future challenges.
Our approach will be a natural continuation of the progress towards the longer-term thinking initiated as part of SRC21 and reflect the lessons learned from that process. It will place even greater emphasis on the evidence and analysis that Scottish Water will provide. Our approach will also ensure there is appropriate flexibility and adaptability in the framework.
KEY PRINCIPLES
Taking account of the strengths of the regulatory framework to date, we propose that SRC27 will be based on the following key principles:
Figure 1: The key principles of SRC27
- Principles of EBP&R and the customer voice
- Evidence and analysis
- Flexibility
- Accountability
- Long-term context
Embedding the principles of ethical business practice and regulation (EBP&R)
Our approach will continue to be underpinned by the principles of EBP&R. We will aim to ensure there is a high level of engagement throughout the Strategic Review of Charges process, consistent with EBP principles and consultation best practice. We will ensure the customer voice is placed at the heart of the decisions taken in SRC27.
A focus on high-quality evidence and analysis
Our approach for SRC27 places even greater emphasis on evidence-based decision making, including demonstrating how risk is understood and taken into account. As such, we will focus on the quality of Scottish Water’s evidence and analysis underpinning how it plans to meet Scottish Ministers’ Objectives in the context of the longer-term water sector vision.
We expect Scottish Water to provide a range of options for investment, including innovative and nature-based solutions to support a range of possible charge paths which demonstrate best value for customers over time.
SRC27 set in the context of the long-term
SRC21 shifted the balance away from focusing on the short-term investment requirements over a defined regulatory period towards adopting a longer-term approach. This recognised the importance of looking beyond the regulatory period, given the long-term nature of the water industry. Our approach for SRC27 maintains this focus, requiring Scottish Water to set out what it plans to deliver over the 2027-33 regulatory period as a step towards achieving the longer-term sector vision.
Through the options for charge paths and investment, we expect Scottish Water to set out the implications of its proposed investment during 2027-33 on levels of investment and risk in future regulatory periods, recognising our statutory duty to promote the interests of both current and future customers.
Ensuring clear accountability
Scottish Water must have full ownership and accountability for its performance during the regulatory control period. This requires defining what Scottish Water is expected to deliver during 2027-33, in the form of financial forecasts and commitments, and then monitoring Scottish Water’s progress over this period. If investment priorities change over time, EBP&R places a greater onus on Scottish Water to explain and document the changes it intends to make through the Scottish Government Investment Group (SGIG).
Building appropriate flexibility
We recognise that Scottish Water needs sufficient flexibility to respond effectively to its challenges, particularly when changes in risk or additional evidence impact investment priorities.
OUR APPROACH
Our approach to SRC27 is in line with regulatory best practice and will deliver best value for customers while helping to improve the overall sustainability of the water industry.
Our approach is firmly based on the Scottish Ministers' expectations, as set out in the Commissioning letter, and the lessons learned from SRC21 and the first three years of the current regulatory control period.
In this overview, we summarise our approach based on key themes and outline the benefits we expect our approach to bring to customers.
A long-term approach
As set out above, SRC27 will be an important step towards responding to these longer-term challenges in accordance with the Scottish Government’s policy development work and policy principles.
We aim to ensure that Scotland’s water industry is sustainable for the long-term, so that future generations can rely on the same services we enjoy today. This means that Scottish Water needs to invest in addressing long-term challenges, such as maintaining and replacing assets, adapting to and mitigating the impacts of climate change, and transitioning to net zero. Considering these broader industry challenges, we will continue to adopt a long-term approach to determining charges for 2027-33.
In light of these challenges and difficult economic circumstances, it is even more critical for Scottish Water to clearly communicate its progress towards achieving its contribution to the water sector vision outcomes and Ministerial Objectives, including the overall benefits delivered to customers.
To support this, we will require Scottish Water to prepare a business plan in the context of the water sector vision outcomes and that sets out clearly the progress it will make towards delivering these outcomes during 2027-33.
The business plan will be evidence-based and set out:
- price profiles and assumed levels of borrowing;
- the allowed for level of investment;
- a forward-looking plan for investment projects and nature-based solutions;
- the outputs necessary to deliver or contribute to the outcomes in the water sector vision in the near term (6-year period); and
- levels of service measures and annual commitments for those measures.
In our draft methodology, we proposed setting a cumulative real charge cap over the regulatory control period – equivalent to the annual average charge cap in the current regulatory period. This approach provides Scottish Water with greater flexibility to adjust the profiling of charges as required (e.g., in response to external factors such as the cost-of-living crisis in this regulatory period). However, the approach could result in variations in the available funds for investment if Scottish Water adopts a price profile different from that set out in the Final Determination.
We recognise the importance of ensuring that Scottish Water has the funding available to meet Ministerial Objectives. As such, we expect Scottish Water to follow the assumed annual price profile from the Final Determination. If Scottish Water proposes deviating from that price profile in a particular year, we expect it to provide the rationale (e.g. based on customer research or its view of the investment requirements) and supporting evidence. We also expect Scottish Water to confirm that the proposed price profile remains consistent with the Principles of Charging from Scottish Ministers as part of its annual charges scheme submission.
We also recognise that Scottish Water’s customer engagement and research programme may identify a preference for a different approach to how charges are set. There is precedent for this during the 2015-21 regulatory period when prices were set in nominal terms. Should this engagement result in a clear preference for an alternative approach, we would be open to considering this as part of Scottish Water’s business plan submission, provided the benefits and risks are considered clearly as part of this research.
Alongside this methodology document, we have published business plan guidance and data tables setting out the information that we require from Scottish Water as part of its business plan submission. The business plan guidance and data tables have been developed through engagement with Scottish Water and were subject to consultation with stakeholders in October and early November.
A key part of the business plan guidance relates to the outcome measures that will form the basis of our monitoring of Scottish Water’s performance during the 2027-33 regulatory control period. We have engaged closely with Scottish Water and stakeholders to develop an initial list of around 40 measures that draw on Scottish Water’s existing measures, standard industry measures used by other economic regulators and best practices in asset management.
Through this work and engagement, we have identified several outcome measures that need further development, covering:
- benefits to customers and communities, as a refinement or complement to the customer experience measures;
- the impact of Scottish Water’s partnerships with customers, communities and other stakeholders (e.g. demand side initiatives such as information campaigns);
- environmental performance; and
- sewerage infrastructure discharges.
We expect Scottish Water to develop these measures and set out its proposed list of outcome measures as part of its business plan submission. Scottish Water may decide to substitute outcome measures or add further outcome measures, recognising that its customer research may identify further priorities or alternative outcome measures that customers value more highly than others. We expect Scottish Water to outline the rationale and supporting evidence for any changes to the outcome measures from the business plan guidance.
We also require Scottish Water to demonstrate how the outcome measures contribute towards the Scottish Government’s National Performance Framework (NPF). The exercise may also identify further gaps that Scottish Water should address through further outcome measures.
Alongside the outcome measures, the business plan will also set out Scottish Water’s forecast performance on these measures over the regulatory period and identify which of these forecasts represent targets – against which Scottish Water’s performance will be assessed. Through these measures and targets, we will hold Scottish Water accountable for its performance throughout the regulatory control period ensuring that benefits to customers are delivered efficiently.
As part of its forward-looking plan for investment, we will require Scottish Water to set out its approach to maintaining the vast network of pipes and treatment works used to provide the water, wastewater and drainage services that we all rely upon in our daily lives. These assets have finite lives and will require replacement as well as ongoing servicing, repair and refurbishment. Given that many of these assets last several decades, we need to consider how the costs of maintaining these assets are shared between current and future customers. SRC21 started a journey towards gaining a better understanding of the future maintenance requirements and transitioning towards a level of charges that reflect the full cost of replacing assets over time.
Our approach in SRC27 will require Scottish Water to continue improving its understanding of long-term asset replacement costs. As part of improving this understanding, we will require an investment baseline which includes clear descriptions of expected measurable outcomes across different asset categories and how these investments will impact the condition and performance of the asset base. We will also require that Scottish Water sets out the medium- and long-term consequences of not making these investments, recognising that this will impact levels of service, risk and the costs borne by future customers.
This approach will enable Scottish Water to deliver a sustainable industry where current and future generations of customers continue to receive high-quality services.
Clear ownership
In line with the principles of EBP&R, Scottish Water must have full ownership and accountability for its performance during the regulatory control period. This means it must have full ownership of its business plan and overall delivery of its investment programme.
In line with best regulatory practice, we will require Scottish Water’s Board to provide an assurance statement on each of the key areas that will significantly impact the outcome of the Strategic Review of Charges. These areas will include that the business plan:
- commands customers’ support;
- is consistent with the long-term sector vision (see Box 1);
- is efficient and contains challenging proposals for efficiency and levels of service performance;
- is deliverable, considering factors such as the capacity of the supply chain in Scotland to deliver the proposed investment programme; and
- maintains an appropriate level of financial strength over the 2027-33 regulatory control period, to ensure that proposals for 2027-33 do not create challenges or risks for the future.
Additionally, since publishing our draft methodology, we have worked with Scottish Water to co-create an external assurance framework that will offer additional verification of the data and explanations included in the business plan. We have developed terms of reference for assurance of the information underpinning the business plan. The terms of reference emphasise that the assurer must be impartial and free of conflicts of interest. We will also liaise directly with the assurer on any questions on the underlying information, providing us with access to the assurer as required. Through these arrangements, we retain the option of conducting our own independent assurance as required, should we not be satisfied with the quality of the assurance provided.
This approach will enable Scottish Water to demonstrate to customers and industry stakeholders how it has ensured the robustness of its information and establish a high degree of confidence in its business plan.
Ensuring efficiency
Scottish Water must demonstrate that its expenditure proposals are efficient and deliver the best possible value for customers’ money.
We require Scottish Water to provide evidence of efficiency in its operating and capital expenditures. As part of this, we expect Scottish Water to adopt different techniques and comparators, including using benchmarking against the performance of the companies in England and Wales more extensively.
Following our methodology consultation, Scottish Water has prepared a plan outlining its approach to efficiency. As part of this plan, Scottish Water will use the statistical models developed by Ofwat (the economic regulator of the England and Wales water industry) and tested by the Competition and Markets Authority in Ofwat’s price review in 2019 (PR19) and those Ofwat has developed for its price review in 2024 (PR24). We consider this approach places greater ownership on Scottish Water. Our approach will involve testing Scottish Water’s proposals thoroughly to ensure it challenges itself to improve efficiency.
In line with the Scottish Government’s policy development work, we expect Scottish Water to adopt different ways of working to address the challenges of a changing climate. We will encourage Scottish Water to work in partnership with others to find better solutions for customers and the environment. These include nature-based solutions such as catchment management and adopting blue-green infrastructure to deal with excess surface water. Such solutions can deliver broader benefits such as reduced greenhouse gas emissions and enhancing Scotland’s natural and social capital.
This approach will ensure that customer charges are no higher than necessary and that customers receive wider benefits from investment.
Evidence based investment
We expect Scottish Water to translate the Scottish Ministers’ Objectives and its contribution to the outcomes of the water sector vision into specific service measures and annual commitments. SRC27 will require Scottish Water to develop an investment programme designed to meet these commitments.
In the Commissioning letter, Scottish Ministers have set out that they expect a suitable governance structure to be developed which identifies, on a rolling basis, the outputs necessary to deliver their Objectives. Consequently, by the time Scottish Water submits its business plan, its investment proposals will be at different stages of development, from pre-optioneering to projects that are underway. Our approach in SRC27 recognises that Scottish Water’s investment will be at different stages of maturity and tailors our approach for reviewing the investment accordingly.
For investment at an early stage of development (pre-development stage in the investment planning process), we will test the reasonableness of Scottish Water’s assumptions for indicative costings and outputs and conduct high-level benchmarking. For investment that is more developed or underway, we will request standard information for projects and programmes of work. This information will include forecast costs, outputs, interim milestones and milestones for projects post commitment. We also require Scottish Water to clearly set out the completion investment and the source of funding for this investment, to ensure that customers receive the benefits they have paid for.
We will use this information to evaluate the efficiency of Scottish Water’s proposals and set an investment baseline in the Final Determination. We recognise that the scope and cost of some investment projects may change as they progress through the investment planning process. We will use the Final Determination investment baseline as a reference point for reviewing the investment progressing through the revised governance process on a rolling basis.
The flexibility of the investment planning process places the onus on Scottish Water to explain and document any changes to the investment baseline over the regulatory period. This allows stakeholders to hold Scottish Water to account for delivery on behalf of customers.
We require two key changes to the investment planning process to meet our regulatory requirements:
- To support our monitoring of Scottish Water’s performance, we will require Scottish Water to produce a delivery plan showing how it proposes to meet the requirements of the Final Determination and an annual delivery plan refresh before each financial year which captures the changes to the investment baseline.
- An additional step in the investment planning process when a project is in development, which would involve us reviewing the efficiency of Scottish Water’s proposed investment. We would not propose reviewing all projects; however, we would review a sample of projects or specific projects that stakeholders consider merit a review. We consider that such a review is consistent with our duties to set charge caps consistent with the lowest reasonable overall cost of Scottish Water meeting the Objectives of Scottish Ministers.
We are collaborating with the Scottish Government and other stakeholders to revise the change process for adjusting Scottish Water’s investment programme.
Customer involvement
Together with Scottish Water and Consumer Scotland, we are evolving the approach to involving customers in the Strategic Review of Charges. Our approach builds on our experience in previous SRC periods ensuring that customers are placed at the heart of the decisions we and Scottish Water make.
We will place full ownership on Scottish Water to develop its business plan and demonstrate that customers’ priorities are appropriately reflected. By extension, this will ensure that our Final Determination of charges commands the support of customers and communities.
Our approach will involve establishing a multi-stakeholder research coordination group to design and implement a comprehensive customer research programme. This programme will focus on understanding strategic prioritisation and customers’ acceptance of Scottish Water’s business plan.
We will also require Scottish Water to ensure a Customer Challenge Group provides additional assurance on the quality of Scottish Water’s engagement and research, and the extent to which customer priorities and research is reflected in the business plan.
WICS, Scottish Water and Consumer Scotland have finalised and signed a Memorandum of Understanding (MoU) to help ensure that consumers, communities and the environment will be central to the forthcoming Strategic Review of Charges. Under the MoU, customers will be engaged throughout the price review process through Scottish Water establishing a Customer Challenge Group named the Independent Customer Group. This will help Scottish Water to create a business plan which is clearly shaped by customers' views and enables WICS to ensure its final determination of charges commands customer support.
The MoU will be delivered under three pillars of work: evidence, challenge and confirmation. Consumer research will provide evidence for the Independent Customer Group to challenge Scottish Water’s decision-making as it develops its business plan. The final confirmation stage will ask consumers whether Scottish Water’s final business plan commands their support.
The key principles underpinning the approach to customer involvement in SRC27 set out in the MoU are:
- Empowerment: Customers and communities will be empowered by setting a clear expectation on Scottish Water to take ownership of its business plan and charges and demonstrate that both command support of customers and communities.
- Legitimacy: Customer research is credible, well designed, comprehensive, robust, unbiased, inclusive and independent and follows best practice. Scottish Water’s business plan visibly reflects customer views including explaining how those views have been has incorporated in the business plan.
- Collaboration: Effective coordination and co-design of customer research building on the principles of Evidence Based Research.
- Independent Challenge: Scottish Water will be challenged robustly to demonstrate that plans are reflective of customer expectations through an independent group.
Our approach also emphasises the importance of Scottish Water ensuring that its business plan takes account of the views of stakeholders, communities of interest (groups that share an identity, experience, or interest), and communities of place (groups that share geography and/or social relationships).
CONTINUED ENGAGEMENT THROUGHOUT SRC27
We are dedicated to providing greater opportunities for engagement throughout the SRC27 process. Those interested in our work will have additional opportunities to engage with us and other stakeholders. We will continue to ask for your views and incorporate your feedback as we progress through the SRC27 process.
Milestones |
Dates |
| Close of draft methodology consultation | 9 October 2024 |
| Final methodology published | 12 December 2024 |
| Draft Ministerial Objectives and Principles of Charging | January to October 2025 |
| Scottish Water's business plan | 26 February 2026 |
| Draft Determination of charges consultation | 30 June 2026 |
| Draft Determination of charges consultation closes | 1 September 2026 |
| Final Principles of Charging | September 2026 |
| Final Ministerial Objectives | October 2026 |
| Final Determination published | 29 October 2026 |