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BACKGROUND - THE STRATEGIC REVIEW OF CHARGES
6. The Strategic Review of Charges is commissioned by Scottish Ministers and undertaken by the Water Industry Commission in accordance with the Water Services etc. (Scotland) Act 2005. The Commission, which was established in July 2005, is Scottish Water's independent economic regulator. It has a statutory duty to set charge caps, at lowest reasonable overall cost, that provide Scottish Water with the financial resources that are sufficient to enable it to meet Ministers' objectives.
7. The Strategic Review of Charges will conclude in November 2009 with the Commission setting limits on the water and sewerage charge levels that Scottish Water can apply for 2010-14. The Scottish Government will take account of this consultation before confirming the principles of charging to be used in the review in March 2008.
8. Ministers' other input to the Strategic Review of Charges is to determine the objectives to be achieved by Scottish Water for 2010-14 (including a range of quality and environmental improvements and continued removal of development constraints). These were set in 2005 and are the basis for the investment programme undertaken by Scottish Water, funded through the Strategic Review of Charges.
9. This consultation takes account of the introduction of competition in the provision of retail services (i.e. customer facing services such as billing, reading meters, handling complaints etc.) to non-household customers from 1 April 2008. As a consequence of this change the principles of charging for 2010-14 will be applied by the Commission when setting wholesale charge levels only for these customers 1. Subject to any relevant licence conditions set by the Commission, it will be for individual retailers to decide how they charge customers for the retail services provided. This change does not affect household customers. Charging principles will continue to apply to end charge levels (i.e. wholesale and retail) for these customers.
10. The former Executive initiated the Strategic Review of Charges in their letter to the Commission of December 2006 (see Annex A). They confirmed that the length of the next regulatory period should be 4 years (i.e. from 2010-14) and confirmed that the objectives Scottish Water should achieve for that period were those defined by the Ministerial direction of September 2005 covering the period 2006-14.
11. The timetable for delivery of the 2010-14 Strategic Review of Charges is:
- Throughout 2007: The Commission consulted on its methodology to ensure that the process would be open and transparent.
- Autumn 2007: The Scottish Government will consult on the principles to be applied by Scottish Water and the Commission in setting charges.
- May 2008: Scottish Water will submit a first draft business plan to the Commission setting out how much revenue it will need to deliver Ministers' objectives.
- September 2008: Ministers will issue guidance on the principles of charging and objectives to be delivered.
- March 2009: Scottish Water will submit a second draft business plan to the Commission which sets out its final view on the costs of delivery.
- June 2009: The Commission will provide a scrutiny on the plan in the form of a draft determination.
- September 2009: Scottish Water and others can make representations on the draft determination.
- November 2009: The Commission will produce its final determination of what the costs of delivering Ministers' objectives should be.
- January 2010: Scottish Water can either accept the conclusions of the final determination or appeal it to the Competition Commission.
- Each year during the 2010-14 period, Scottish Water will submit to the Commission for approval detailed charging schemes based on the principles of charging determined by the Scottish Government and within the charge caps set by the Commission.
SUMMARY OF CURRENT PRINCIPLES OF CHARGING 2006-10
12. The Principles of Charging statement for 2006-10 (see Annex B) was issued in September 2005 following consultation and research. Its key features are summarised below.
Full cost recovery
13. Charges should cover costs. Public expenditure support to Scottish Water in the provision of its core services would only be in the form of government lending - no grant would be paid. Further, customers would only be asked to meet additional costs beyond those allowed for in a charges determination, where these arose as the result of external factors beyond the control of Scottish Water. This arrangement protects the position of customers and ensures that they do not pay twice for the same services or compensate the company for inefficiency or poor management.
Stable and affordable charges
14. Charges should be affordable and stable during the charging period and sustainable in the long-term. In setting this principle, Ministers wished to ensure that Scottish Water would have the resources to deliver the maximum affordable improvements in public health and environment protection standards, support housing and economic growth through investment in new water and sewerage capacity taking account of the essential and desirable objectives identified in their direction.
Financial sustainability and the level of Ministers' lending to Scottish Water
15. As a minimum, Scottish Water's financial strength should be maintained during the period and if possible, slowly improved. Levels of borrowing should be consistent with long-term financial sustainability and be consistent with the optimum maximum size of the capital programme.
16. In determining charges, the Commission would determine the amount of lending required by Scottish Water for each year of the period 2006-10 to support the investment programme, subject to a maximum level of £182 million per year which Ministers were prepared to make available.
Harmonised charges
17. Customers in any part of Scotland would pay the same rate for the same service.
Affordable charges for low income households
18. Charges paid by low-income households should be affordable as far as possible. The 25% discount on water and sewerage services charges available to single-adult households should remain in place. Households with two or more adults and in receipt of Council Tax Benefit should also have their charges reduced by up to 25%. These measures are now in place.
Cost reflective charges
19. Charges in general should be broadly cost-reflective - i.e. charges for given services to particular customer groups should be set to recover the cost to Scottish Water nationally of providing that service to that group as a whole. Affordable charges for low income households are an exception to this general principle.
Phasing of increases
20. Achieving stable charges in real terms could be consistent with some charges rising above inflation and others falling, for example where tariff rebalancing is justified. Any increases in charges should be phased over the regulatory period unless there is a more effective means of minimising the adverse impact on customers.
Paying for roads drainage
21. Scottish Water household and non-household charges should continue to include an appropriate element to recover the cost to Scottish Water of draining roads.
Paying for increased local capacity
22. Where enhancements to the local infrastructure are required to enable new developments to be connected to the public networks, developers should meet the net cost to Scottish Water of such enhancements.
Future charging arrangements for non-household customers
23. Following a commitment in the previous statement and consultation in late 2006, proposals to introduce general metering for non household customers and to change the basis of charging for surface drainage to one based on area drained are being implemented. Roads drainage would continue to be recovered with water services charges by reference to the rateable value of individual premises.
24. Pending introduction of these changes, Ministers announced on 31 August 2004 that those premises which had been eligible for exemption from paying charges from 1 April 2002 to 31 March 2006 under the Water and Sewerage Charges (Exemption) (Scotland) Regulations 2002 should continue to be eligible in the period 1 April 2006 to 31 March 2010.
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