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Investing in Water Services 2006 - 2014

2 ESTABLISHING FUTURE INVESTMENT NEEDS

Introduction

2.1 As noted in Chapter 1, the current water industry investment programme (Quality and Standards II) will end in March 2006. Its successor, Quality and Standards III (Q&SIII), will advise Ministers on the nature and scale of investment required to meet public health and environmental requirements, alongside investment needs to improve and extend the existing network. This work, based on the most comprehensive assessment of investment needs for the industry and aided by this public consultation, will inform Ministers decisions on the establishment of an affordable and deliverable investment programme for the industry.

2.2 The Quality and Standards III Project is due to report in January 2005. The final conclusions, as agreed by the Scottish Ministers, will establish the key investment outputs they wish Scottish Water to deliver for 2006-2014. Based on these directions and other requirements Ministers may set, the Water Industry Commissioner⁶ will undertake a Strategic Charges Review, in which he will determine the charge levels customers will be required to bear in order that Scottish Water can deliver this programme at the lowest reasonable overall cost.

Time period for the investment programme

2.3 A key issue in the design of the Quality and Standards III project has been the time period the investment programme should cover. Quality and Standards I covered a 2-year period while Quality and Standards II covers 4 years. A longer planning horizon for Q&S III seems desirable to facilitate better business planning and to assure compliance with longer-term legislative requirements, many of which extend out to 2010 (e.g. Water Framework Directive). A longer investment period will also assist Scottish Water to plan and deliver the investment programme more efficiently, thereby securing better value for money for the customer. With these goals in mind, and on the advice of the key stakeholders, Ministers have decided to set the planning horizon for Quality and Standards III at 8 years (2006-2014). However, they also recognised that with such a planning period it would be necessary to put in place an effective review mechanism to ensure that the programme remains focused and flexible.

Progress made by the working groups

2.4 Since early last year, working groups involving a range of key stakeholders for the industry have been examining the investment requirements of different aspects of the Scottish water services industry. These working groups covered:

• Maintenance and extension of water/wastewater networks;
• Environmental issues;
• Drinking Water Quality and Water Resources;
• Additional Customer Service Issues.
• Building upon the improvements being delivered by the current investment programme (Q&SII), each group has been working systematically to:
• identify and define the drivers of future investment, (e.g. new legislative requirements);
• establish the gap in performance between where Scottish Water need to be to comply with the new standard and where it will be at the end of Q&SII; and
• establish the costs, benefits and risks associated with each option.

2.5 A range of different stakeholders have participated in discussions around the key issues covered by the working groups. These groups have included: Communities Scotland, Confederation of British Industry (Scotland), CoSLA and local authorities, Drinking Water Quality Regulator, Historic Scotland, Homes For Scotland, Scottish Environment Protection Agency, Scottish Executive Departments, Scottish Federation of Housing Associations, Scottish Natural Heritage, Scottish Water, Water Customer Consultation Panels and the Water Industry Commissioner.

2.6 Scottish Water have also provided a very important role in the work of all working groups in deploying their expertise on the key issues, providing key information on their current level of performance as a first stage in defining the performance gap, and providing the important costing information (see below).

2.7 Working groups have provided interim assessments of their investment requirements and associated costs for the water industry, 2006-2014, and it is upon these emerging findings that this consultation is based. Further detailed work is ongoing to refine costs, assess benefits and risks and pull individual investment requirements into overall investment programmes for each area. Thus the information presented in this report is at an early stage in order to allow a wider engagement on the issues and the input of views into the process at a point where they will be most influential.

Costing Processes

2.8 Scottish Water has employed a wide range of techniques to establish the relevant costs. For capital maintenance, standard industry tools have been employed to determine the investment required to maintain a defined level of service. In other areas, such as the cost of tackling development constraints and achieving quality enhancements, the costs have been provided by Scottish Water’s joint venture capital delivery partners, Scottish Water Solutions Ltd. Certain specialist parts of the investment programme such as Telemetry and Health and Safety have been costed by individual consultants who are specialists in these fields. Extensive use has been made throughout of Scottish Water’s standard cost base which provides schedule rates for a range of investment activities.

2.9 All costs provided in this document are estimates, rounded to the nearest 10, and are in October 2002 prices. It should be pointed out that these cost estimates are liable to change a) as the programme becomes more defined and cost overlaps are removed and b) as a result of the regulatory assessment to be undertaken by the Water Industry Commissioner. Further detail on the cost processes are provided in Annex A.

The Next Phase of Work

2.10 A key element in the next phase of the work is for the working groups to consider emerging requirements against the global constraints; cost effectiveness; deliverability; affordability; and sustainability (see Chapter 1). It is clearly essential that the required programmes of works are carried out at minimum cost to customers and that the requirements identified are reasonable and soundly based. As part of this process we are proposing that they use the following criteria to help determine final investment plans. These criteria are as follows:

• 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 in the regulatory period or invest over a longer period), and, if not, should there be?
• What level of priority should be attached to the individual investment requirements?

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