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Investing in Water Services 2006 - 2014

Executive Summary

The availability of wholesome drinking water and the safe disposal of wastewater are crucial to public health and a clean environment. This consultation on the future investment programme for the water industry provides information on the scale of forthcoming investment requirements from 2006-2014. It seeks views on priorities for the water industry on a scale that is affordable and deliverable.

The Scottish Executive is also carrying out a parallel consultation on the principles of charging for water services. Called Paying for Water Services 2006-2010, it aims to develop a consensus on how customers should pay for water services. Taken together these 2 consultations will help Ministers set the policy objectives for the industry within the new regulatory framework both in terms of forthcoming investment requirements and the principles to be used in determining the charges water customers should pay.

Chapter 1 outlines in detail the scale and impact of investment currently being made in the industry. At £1.8 billion over the period 2002-2006, charge payers are investing £192 per household per annum in the water and wastewater infrastructure, a level which exceeds equivalent investment levels in England and Wales. Such investment has led to significant improvements in drinking water quality and environmental protection. However, investment in water services, from which we all benefit, is a necessary and ongoing process. The Chapter also seeks views on the 4 guiding principles the Scottish Executive proposes to use to establish the next investment programme for the Water Industry. These are that the programme should be cost-effective, affordable, deliverable and sustainable.

Chapter 2 explains the process underway to establish a successor investment programme to Quality and Standards II. Quality and Standards III is the most comprehensive investment needs and costing appraisal to date. It seeks to ensure that decisions about the new investment programme are informed by the most up-to-date information, based upon expert advice and informed by a range of stakeholders. Working groups have provided interim assessments of investment requirements across a range of areas and it is upon these that the consultation is based. However, the working groups are undertaking further work to look at the costs and assess their emerging requirements against the global constraints of affordability and deliverability. The chapter seeks views on the criteria to be used to refine investment requirements into a deliverable and affordable programme. These are:

• Is it legitimate for customers alone to pay for the investment under consideration?
• Is the proposed investment option the most cost effective available?
• Are the planning assumptions which lie behind the requirement reasonable?
• Is there any flexibility built into the requirement (either to meet a lower standard of compliance or invest over a longer period), and, if not, should there be?
• What level of priority should be attached to the individual investment requirements?

In Chapter 3 the level of investment required to keep the industry’s existing assets working properly is considered. By using the water industry’s best practice approach for capital maintenance, the Quality and Standards III Project wishes to promote a clearer relationship between capital maintenance spend and the standards of service the customer experiences (outlined in tables 4a and 4b). Using this approach, the report estimates that it will cost approximately £2,200 million over 8 years to keep service levels constant.

Chapter 4 looks at the need to provide additional capacity within the water and wastewater infrastructure to allow new housing or businesses to connect or to allow existing properties to connect for the first time. Under current legislation Scottish Water is not required to connect properties to the network if it is "beyond reasonable cost" for them to do so. This can lead to new developments being "constrained" and existing properties being unable to connect to the network. A key issue addressed in Paying for Water Services 2006-2010 is who should pay for extending the network - customers through charges, or the developer.

We estimate that the costs of extending the networks to release constraints on new developments within Quality and Standards III to be around £1,000 million if the water charge payer were to pay and around £500 million if the costs were shared with the developer. The approximate cost to connect existing properties is £200 million (water) and £260 to £600 million (wastewater).

In Chapter 5, the investment required to secure compliance with current and new environmental standards is discussed. Investment in water quality and environmental objectives is likely to be the largest single component in the proposed Quality and Standards III investment programme. This is due in part to the legacy of under-investment in the infrastructure and the growth over time in the number of legislative requirements, mainly arising from European Directives, such as the Urban Waste Water Treatment Directive, which provide for the protection and enhancement of our water environment (Annex B).

At the moment the indications are that meeting mandatory requirements could cost in the region of £2,500 million over the next 8 year period. These are likely to focus on improving our sewer systems, upgrading waste water treatment plants, and addressing other environmental issues such as by-products of wastewater treatment e.g. sludge. The requirement to demonstrate improvement towards the stricter guideline standards could add a further £500 million over the next 8-year period. What is certain is that substantial investment on improvement in the water environment will be required for many years to come, for Quality and Standards III and beyond.

A good deal of work will be required to bring the total of these requirements within the bounds of an affordable and deliverable programme for Quality and Standards III, as proposed in Chapter 2. Key issues will be whether there are cheaper methods of delivering compliance other than by investing in the water industry, as well as options for phasing and prioritising the investment requirements.

Investment in meeting drinking water quality and water resources standards is outlined in Chapter 6. Here investment is also driven largely by legislative requirements mainly arising from European Directives (Annex B). In terms of drinking water quality, key requirements are to meet mandatory lead and trihalomethane standards and compliance with the Scottish Water Cryptosporidium Directions 2003. Other investment requirements include the need to meet security and emergency provisions to protect the water supply from malicious or accidental damage and the Water Framework Directive’s water resources provisions. An estimate of meeting these requirements is in the region of £1,650 million for the period 2006-2014.

Chapter 7 of the consultation discusses investment requirements for other priorities for the customer including odour from wastewater treatment works, water pressure, and sewer flooding. It seeks views on whether these issues should be included in the programme and whether they should be funded by higher charges.

Given the time period covered by this investment programme, inevitably there will be uncertainties about the investment needs. Chapter 8 begins to set these out and outlines the processes planned to manage this. Uncertainties arise around new European legislation; new Scottish Executive policy, and unforeseen/unpredictable customer demands or investment needs. The Executive has committed to establishing an appropriate review mechanism to deal with such uncertainties.

The final chapter briefly reviews the process underway to formulate a new investment programme for the water industry. It notes that while this consultation is based upon interim assessments of costs which are likely to change, the scale of investment requirements (particularly those driven by legislative requirements) will undoubtedly limit the scope for public policy choices. Given this, action is underway to re-examine investment needs, costing and technical options. However the chapter notes that there are already some clear messages beginning to emerge. Firstly, it seems certain that significant investment will be necessary in the water industry for many years to come on a scale at least equivalent to, and perhaps larger, than has been attempted in Quality and Standards II. Secondly, while the Executive will pay very careful attention to concerns about deliverability and affordability in arriving at its final requirements for Quality and Standards III, the extent of the pressures is such that water prices will, in all likelihood, have to rise to accommodate an increase in investment.

The Executive has chosen to consult at this early stage in the development of the water services investment programme to allow for wide engagement on the issues. We hope that you will take this opportunity to comment and thereby influence the future of your water services.

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