Minutes of the 160th Board meeting of the Water Industry Commission for Scotland on 3 October 2024

Present:    

Robin McGill (Member)  
Ronnie Hinds (Member)
Morag Sheppard (Member) 
David Satti, Interim Chief Executive

In attendance:    

Colin McNaughton, Director of Analysis – Items 5 and 6 
Donna Very, Director of Corporate and International Affairs – Item 3 
Andrea Mancini, Director of Price Review – Items 5 to 7 
Shona Coan, Head of Finance – Item 4 
Richard Smith, Audit Scotland 
Lauryn Graham, Audit Scotland

Apologies:    

Donald MacRae (Chair)
Ann Allen (Member)       

Chair’s opening remarks

Robin McGill commenced the 160th meeting of the WICS Board, extending a welcome to Audit Scotland, who attended the meeting as observers in preparation for the upcoming audit of WICS' 2023-24 accounts.

1.    Apologies for absence

There were apologies from Donald MacRae and Ann Allen. In the absence of the Chair, Board Members agreed that Robin McGill would chair the meeting.

It was also noted that there is currently no formal Deputy Chair arrangement and that the Board may consider establishing this in its terms of reference at a future date.   

2.    Minutes of the last meeting and regular updates     

2.1    Declaration of conflicts of interest in relation to the agenda

It was noted that Morag Sheppard is a Member of the Environmental Standards Scotland Board but that no conflicts of interest are present in relation to the agenda for this meeting.

2.2    Minutes of the 159th meeting

The Board approved the minutes of the 159th meeting and the note of the June 2024 Board update meeting.

The Board approved the minutes of the 159th meeting and the note of the September 2024 Board update meeting with the following key points discussed and clarified: 

• In September, the Board approved up to £30,000 for WICS to access media support services until the end of the 2024-25 financial year. The Board requested regular assessments of the contract’s value, with a decision on its continuation to be made in early 2025. 
• The Interim CEO stated that WICS currently lacks resource for an in-house press office but will consider whether this capability can be developed in the future. 
• Ronnie Hinds raised a query regarding the status of a diagram outlining the roles and accountabilities between WICS, Scottish Water and Business Stream. The Interim CEO noted a diagram of Scottish Water’s structure is provided, but further information has not yet been circulated.
• Board Members discussed the progress of appointing a permanent CEO and the status of the external salary review for the role. The interim CEO noted that the timeline has extended due to the requirement to complete an external salary weighting exercise. As a result, the position is unlikely to be advertised before January 2025.
• The Board acknowledged that this delay may require engagement with the Cabinet Secretary regarding an extension to the interim CEO term, which ends in March 2025. Members highlighted the time criticality of the remuneration committee decision and Scottish Government approval of the business case. 
• Board Members and Audit Scotland acknowledged WICS’ current high cash balance and the prospect returning funds to Scottish Water and Licensed Providers. Board Members advised caution regarding any commitment to return funds before a full review of WICS' financial sustainability is completed. 
• Morag Sheppard clarified that the Audit and Risk Committee will take forward work to establish a financial reserves policy for WICS.

2.3    Summary of action points

The Board noted the summary of actions. The following points were arising:

Action 1 – Financial sustainability: The Interim CEO noted that there are resourcing limitations within the finance team which is delaying progress. He explained that this action is unlikely to be complete before end of January 2025 but that discussions the recruitment of additional resources across the organisation to fill vacant positions. The Board agreed to amend the wording of this action to specify that the review relates to the budget for the upcoming corporate planning period, which spans 2027-2033.

Action 2 – Hybrid working:  This action is underway. The Interim CEO explained that WICS has an agreement in place with Zero Waste Scotland (ZWS) to share office space until such time as a final decision is made on the future of the subleasing arrangements. 

Action 3 – Governance Framework: This action is underway. The Board discussed initial changes proposed by the Scottish Government to the Framework Document during September.  The next step is to determine whether any aspects of the framework require legal review.

Action 4 – Revenue generation: This action is ongoing. The Interim CEO is seeking clarification from the Scottish Government on WICS revenue generating activity. Whilst revenue generation activity remains paused pending this clarification, Board Members reiterated that international networking and knowledge exchange should continue as a key part of our regulatory role. 

Action 5 – Resourcing plan:  The Interim CEO confirmed that the intention is to cover this action as part of the ongoing HR review of roles and responsibilities.  Following feedback from the Board during September update meetings, the Interim CEO is reconsidering the timeline for this work. Board Members emphasised the importance of communicating with staff at appropriate points in the process as part of the HR review.  

Action 6 – Code of Practice:  This action is covered at Item 7.2 

Action 7 – Scheme of delegation: This action is ongoing. It will be reviewed and completed as part of WICS’ Governance Framework. 

Action 8 – Financial reserve policy:  This action is ongoing and will be taken forward by the Audit and Risk Committee.

Action 9 – Former KC retainer:  The Interim CEO reported that we are now able to quantify past expenditures on the retainer and commissioned services. Further investigation is underway to examine the details of each commission. The CEO emphasised that additional work is needed to fully understand this information, particularly given its historical nature.

Action 10 – Board sub-committee: This action is ongoing. Work is underway to establish a sub-committee of the WICS Board to provide additional support and challenge on WICS’ organisational change initiatives. 

Action 11 – WICS, Scottish Water and Business Stream roles and accountabilities: This action is ongoing.

2.4    Non-Executive Members Update

The Interim CEO and Ronnie Hinds provided an update on the Scottish Government’s independent review of WICS’ governance. Ronnie Hinds explained that he and the Interim CEO provided feedback to the Scottish Government on its draft report. There is not yet a clear deadline set for the completion of the report or its publication. The Ernst Young transactions review component of the review is not yet complete.

Robin McGill highlighted that WICS had already identified key issues through its internal transactions review, which prompted corrective actions. This internal review formed the foundation of WICS’ internal audit report, with all findings made publicly available and discussed with the Public Audit Committee.

Audit Scotland confirmed that in its audit of WICS 2023-24 accounts, there will be a distinction made between the periods before and after the Section 22 report and the corrective action taken thereafter. It was noted Audit Scotland is likely to comment on WICS’ proactive review of the first nine months of 2023, and the issues identified.

There was a discussion on WICS’ past revenue generating activity, the Scottish Government’s Hydro Nation initiative and the general ambition that public bodies seek out revenue generating opportunities. It was noted that Audit Scotland is also likely to comment on WICS’ revenue generating activity in its annual audit, noting that this aligns with the commitments made in the WICS’ corporate plan. However, further guidance from the Scottish Government is needed to ensure international work is conducted in alignment with expectations. 

The Interim CEO highlighted that there is significant interest in the Scottish regulatory model, noting that the CEO of the Essential Services Commission of South Australia (ESCOSA) will visit Scotland to understand how WICS monitors Scottish Water’s performance.  The Interim CEO confirmed that WICS intends to continue international networking activity as part of its core regulatory role, with clear budgets in place to ensure these activites deliver best value. 

3.    Annual work plan progress 

3.1   Annual work plan progress update

The Board noted a paper which provides a summary of progress in delivering the 2024-25 work plan. 

Recruitment of the CEO 

The Director of Corporate and International Affairs provided an update on the recruitment of a permanent CEO. Board Members noted that the external review of the CEO salary has now concluded. Board Members expressed the importance of appropriate comparisons and ensuring that WICS’ size and skill requirements are adequately reflected. The Director of Corporate and International Affairs confirmed that a detailed discussion with Korn Ferry will be held to ensure WICS is being compared to appropriate organisations given its public sector status. Once this benchmarking data is finalised, it will be incorporated into the business case which will then be shared with the Scottish Government Sponsor Team for approval.

The Interim CEO expressed concern over the time taken to obtain Scottish Government approval, but hopes that now the salary benchmarking is complete, this will move forward without delay. 

Board Members noted that appointing an executive search agency is a common practice for senior executive roles and as such, should not be considered contentious expenditure provided best value is demonstrated.

The Board agreed that a November 2024 deadline is critical for submission to the Scottish Government’s remuneration Group to allow the recruitment process to proceed. 

Hybrid working

The Director of Corporate and International Affairs provided an update Hybrid Working arrangements. She explained that WICS now has an agreement in place with Zero Waste Scotland (ZWS) to use office space until such time as a final decision is made on the future of the subleasing arrangements.  She highlighted engagement with employees, including two workshops and a series of one-to-one discussions. A key theme from these sessions is that staff value maintaining a high level of flexibility and ensuring there is a clear purpose for office-based work.

Morag Sheppard suggested determining a minimum required time for staff to spend in the office. The Interim CEO informed the Board that an options appraisal and business case for future office space will be developed. The Director of Corporate Affairs assured Board Members that a hybrid working policy is in development. Morag Sheppard also noted the link between hybrid working, staff contracts and the HR role review activity.

The Board acknowledged that recruitment challenges persist, particularly with attracting analysts to Stirling, as many reside in Glasgow or Edinburgh. This issue will be monitored as hybrid working arrangements evolve.

Public Audit Committee

The Interim CEO updated the Board on recent engagement with the Public Audit Committee (PAC). Board Members noted that it is likely that the former Chief Executive will be invited to provide evidence to the Committee.  The Interim CEO informed the Board that a potential additional Committee meeting in November may address the Scottish Government’s review of WICS, depending on the finalisation of the report.

Audit Scotland confirmed that the annual audit report will include an irregularity opinion related to the settlement agreement and payment made to the former CEO. Audit Scotland acknowledged that the Board's actions were based on verbal guidance received from the former Scottish Government Deputy Director, and the submitted business case supports the rationale for the decision.

It was further noted that the Scottish Government's Sponsor Team plays a key role in providing formal guidance on the Scottish Public Finance Manual (SPFM) in such matters. Board Members discussed the challenges posed by the informal nature of the Scottish Government’s sponsorship engagement with WICS, emphasising that it would be inaccurate to attribute the shortcomings of the process solely to WICS.

Audit Scotland committed to including additional context in its report on the irregularity opinion. This will feature a factual account of events, a timeline, and relevant extracts from the public finance manual.

Risk

Ronnie Hinds highlighted that the information provided on risk does not follow the format presented to the Audit and Risk Committee and requested confirmation that this is not the final proposal for risk reporting for the Board.

The Interim CEO confirmed that we are working to revise our risk management reporting, and this information shows the work competed to date.

Board Members were concerned about the high number of critical risks shown on the heatmap and requested further sight of the mitigations in place to bring these risk scores down.

Morag Sheppard recommended that the Audit and Risk Committee work to develop a revised risk reporting template.

4.1    Finance

Finance report

The Head of Finance presented an overview of the financial results for the four months ending July 31, 2024. She explained that the financial profile for August showed no significant changes compared to July, with continued underspending and a favourable net income position. She emphasised that overall spending on consultants remains below budget, reflecting a cautious approach to expenditures in light of increased external scrutiny of WICS’ finances.

The Interim CEO noted that planned spending on communications has been reduced, with funds being held until the Draft Determination and Final Determination. He also explained that the organisation is exploring lower-cost consultancy services to support the technical aspects of the Strategic Review of Charges, aiming to determine whether this approach offers better value for money. Additionally, it was highlighted that internal audit work has not yet begun; however, Azets has now been appointed following a competitive tender process.

The Head of Finance confirmed that WICS’ levy has now been paid. Morag Sheppard queried the cause of the delay in this payment.  The Head of Finance explained that Scottish Government approval processes are taking longer than expected and that we are also experiencing significant delay in relation to pay policy.

Ronnie Hinds noted that WICS spends a similar level of remuneration for operational support compared to network regulation querying whether this is the correct balance. He also noted that WICS spends more in consultancy for operational support than in network regulation and retail combined.

The Head of Finance noted that current activity reporting is based on a simple time sheet which may not capture all detail, for example, some staff are categorised as operational support by default, but time is also spent working on network regulation.

Robin McGill suggested it may be helpful to build an understanding of the exceptional costs we have experienced since December 2023, for example on additional legal fees and media support services.

5. Strategic Review of Charges

5.1 Approach to final methodology 

The Director of Analysis gave an overview of the paper detailing our approach to finalising the methodology for SRC27. He noted that the consultation will close on the 9 October and final methodology published on 12 December.  We have shared early drafts with Scottish Water and other stakeholders throughout the drafting process to ensure we have a broad understanding of the type of feedback we can expect.

Board Members noted that they will receive two papers at the November meeting, one outlining the feedback received and the proposed changes in response to that feedback and a second paper providing an updated overview that the Board will be asked to approve.

Board Members approved the proposed approach. 

5.2 Business Plan guidance

The Director of Analysis presented an overview of the approach to developing and consulting on Scottish Water’s Business Plan guidance and data tables. He emphasised that issuing such guidance and data tables is standard regulatory practice, consistent with WICS' approach in previous regulatory control periods.

He explained that there has been open and ongoing collaboration with Scottish Water throughout the development process. Scottish Water has had full access to draft documents in line with EBP&R. Scottish Water has raised challenges on key areas within the data tables, particularly regarding the availability of some required information and is proactively bringing forward alternative options for WICS to consider. 

The Board noted that WICS plans to engage with sector stakeholders, particularly the quality regulators, to ensure the data tables meet their expectations. There is also an intention to publish and consult on the documents to create a transparent audit trail of the feedback received.

The Director of Analysis highlighted the focus on receiving feedback regarding outcome measures. While it is Scottish Water’s responsibility to propose these in its business plan submission, WICS will provide an initial view based on current measures, commitments, and identified gaps. He emphasised that Scottish Water will be expected to demonstrate how these measures reflect customer research.

The Board discussed the paper and made the following key observations: 

• Morag Sheppard queried the quality of Scottish Water’s information given the lack of data on stormwater flows which has been documented in a recent Environmental Standards Scotland report. The Director of Analysis responded that Scottish Water’s information is subject to confidence grades, which provide assurance on data accuracy and completeness.
• Ronnie Hinds questioned the alignment of Scottish Water’s existing measures for unplanned interruptions with standard industry measures, and whether WICS should require both. The interim CEO noted that the industry in England and Wales has made further progress in this area, and it is WICS' hope that Scottish Water could adopt a similar approach, which would also enhance comparability.
• Ronnie Hinds also raised linking performance measures to the National Performance Framework (NPF). The Director of Analysis agreed there is potential to encourage Scottish Water to align measures with the NPF. 
• Robin McGill expressed interest in asset condition measures. The Director of Analysis confirmed that additional requirements will be placed on Scottish Water, and that an additional information table, modelled on Ofwat’s data collection, has been developed to assist. 
• Morag Sheppard queried the availability of information on Scottish Water’s service coverage. The Director of Analysis confirmed that Scottish Water provides data on connections and population served as part of its annual information return to WICS. 

Board Members approved the direction of travel set out in the paper. 

5.3 MoU customer involvement

The Director of Price Review provided an overview of the MoU between WICS, Scottish Water and Consumer Scotland. 

Board Members discussed the selection process and the role of the Independent Customer Group (ICG) and Research Coordination Group (RCG). The Director of Price Review confirmed that Consumer Scotland will be involved in the selection process, and that Scottish Water has overall ownership of the ICG. Members noted that WICS will take an observer role in the RCG only and that we retain full ability to challenge Scottish Water’s business plan ensuring that it can evidence that its proposals command the support of customers. 

Robin McGill raised a wider point regarding WICS’ role in stakeholder forums. He noted that these forums represent an opportunity for WICS to communicate its role. He highlighted that all WICS staff and Board Members are advocates for WICS and that improving our communications capability is vital.  The Interim CEO explained that Directors are primarily representing WICS in stakeholder forums but that there is increasing involvement from analytical staff. 

The Board approved the MoU.

5.4 Ofwat determinations

Board Members agreed to review the materials offline and consider revisiting a future session.

6. Scottish Water's costs and performance

6.1 Key messages Scottish Water's performance report

The Director of Analysis presented the draft key messages for Scottish Water’s performance report, seeking Board approval ahead of final approval at the November meeting.

Board Members discussed the draft key messages in the context of the ongoing Strategic Review of Charges (SRC), recognising the opportunity to highlight critical areas that will shape our approach to SRC27. Key topics such as net zero emissions and major investment projects were identified as areas that require clear signalling and focus during SRC27. 

Members raised concern about the potential deferral of investment projects from SRC21 to SRC27, emphasising the need for transparency about the impact of delayed investment on asset condition and associated risks. It was recommended that the performance report be used to underscore key messages for SRC27 for example, the need for increased investment to maintain Scottish Water’s ageing asset base, and to highlight the importance of Scottish Water communicating the impact of delayed investment for customers and the wider environment. 

Morag Sheppard raised the link between environmental compliance and maintenance activity and suggested referencing external environmental reports to provide broader insights. The Interim CEO explained that the performance report is based on data provided by Scottish Water in its annual return submission. However, WICS is exploring ways to enhance performance reporting and the extent to which we can use wider sources of information to make our reporting more relevant and engaging for a wider range of stakeholders. 

The Board discussed the costs associated with leakage, including cost per litre lost. The Director of Analysis noted that the Economic Level of Leakage (ELL) is currently used, and that leakage reduction efforts should focus on areas with supply-demand deficits. The Board was informed that Scottish Water’s leakage assurer has made recommendations for improving leakage metrics, which WICS will further explore.

The Board approved the key messages for the performance report. 

7. Retail market

7.1 Licence revocation

The Board discussed the revocation of the water services licence and sewerage services licence of Three Sixty Water Services Limited (Three Sixty Water). It was noted that there are no pending issues or outstanding liabilities that would impede the revocation.  

The Board approved the revocation of the licences currently held by Three Sixty Water. 

7.2 Code of practice 

The Director of Price Review provided an update on the development of the Code of Practice and Market Health Check (MHC), which aims to provide customers with greater confidence in service levels and create an assurance mechanism.

The Board noted that, at this stage, around two-thirds of Licensed Providers have committed to the code, representing around 80% of the market. 

The Director of Price Review outlined next steps, including a consultation process to propose to implement the Code by means of a voluntary licence condition. The aim is for the Code to go live in April 2025, with the first Market Health Check set for October 2025.

The Board discussed the detail of the proposal and expressed support for the voluntary nature of the code as well as the overall approach. Board Members questioned whether the code is stretching enough to improve service standards. The Director of Price Review explained that the code had been benchmarked against similar codes in the utility sector and the English retail market. There are certain customer protections that are more enhanced in the Scottish code such as the requirement for an independent assurance process. 

The Board also discussed the use of third-party intermediaries (TPIs) in the market. The Director of Price Review explained that we plan to review the issue in more detail and seek to discuss with other economic regulators to understand any other lessons learned.  

The Board approved the proposed approach to consultation and overall direction of travel.

7.3 Retail consultation 

The Director of Price Review provided an overview of the approach to a consultation on ensuring a level playing field in the market and Business Stream’s governance code. 

The Board discussed the structure of Scottish Water and Business Stream noting that a key element of the governance code requires Business Stream to operate independently of Scottish Water given its incumbent market position and ownership structure. 

The Board discussed the need to review the governance code, particularly the provisions relating to the information sharing rules between Scottish Water and Business Stream. The Board noted that the consultation provides an opportunity to evaluate which elements of the code may no longer be relevant and how governance arrangements can adapt to market changes and future challenges.

The Board discussed and approved the proposed approach and content of the consultation that was set out in the paper.

Meeting close

Robin McGill closed the meeting and thanked Board Members and the team for their contributions.