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Paying for Water Services 2006-2010

EXECUTIVE SUMMARY

The introduction to the paper sets the context within which the consultation on paying for water services is taking place. It describes the Executive’s proposals, included in the Water Services etc. (Scotland) Bill, for reforming the economic regulation of Scottish Water and how these will affect the management of the next strategic review of water charges. Subject to the Scottish Parliament approving the Bill, the review will culminate in the Water Industry Commission setting limits on what Scottish Water can charge its customers in the period 2006-10. It will do so in light of decisions that the Executive will make in January 2005 about the standards and objectives that Scottish Water is to achieve in that period and about the principles that the Water Industry Commission is to apply in setting charge limits for each group of customers. The decision on charging principles will take into account responses to the consultation exercise that the paper is initiating.

Section 1 of the paper summarises, and invites views on, the principles that the Executive proposes should underpin charge limits and charges schemes in the period 2006-10. In particular it asks whether respondents agree that:

• Charges should be set to recover the full costs incurred by Scottish Water in providing public water and sewerage services.
• Charges for households should be set with a view to ensuring that they are as affordable as possible for low-income households.
• All charges should be set on a harmonised basis, so that customers in the same group and using the same services should pay for these services at the same rate, irrespective of where they are in the country
• Subject to making charges affordable for low-income households, harmonised charges to a particular group should be set to recover as closely as possible the fixed and variable costs of serving that group.
• All significant changes in charge levels arising out of the application of these principles should be introduced gradually during the period 2006-10, and beyond in the most significant of cases.

Where respondents do not agree that these principles provide an appropriate basis for setting charges, they are asked to suggest principles that they consider would be appropriate and why. (Consultation Points 1 and 2)

Section 2 of the paper considers, and seeks views on, how the principles outlined in section 1 might be applied in a number of different cases. The cases considered are:

The possible existence of cross subsidies from non-household to household customers and how any such cross subsidy should be addressed, concluding with the question:

Consultation Point 3: If it is established that there are significant cross subsidies between customer groups, should these be retained, or withdrawn gradually over time?

The arrangements whereby the local authorities bill and collect household water charges on behalf of Scottish Water, the discounts on water charges to single adult households and to the owners of second homes that are a consequence of these arrangements and the scope to replace these discounts with discounts targeted more clearly on low income households. This prompts the question:

Consultation Point 4: Should a new system of better targeted discounts for low-income households be funded from the savings that would be generated by abolishing the discounts currently granted to single adult households and in respect of second homes, or should the current system of discounts be retained?

The present arrangements by which different groups of non-household customers are charged for a range of services, leading to the questions:

Consultation Point 5: Should the current arrangements for charging non-household customers for surface and highway drainage be retained, or should preparations be made to establish by 2010 banded charges in respect of these charges?

Consultation Point 6: Should un-metered non-household premises continue to pay by reference to rateable value, or should they become metered, or should preparations be made to enable these premises to be charged by reference to a system of bandings to reflect broad consumption levels?

How the balance between charges and borrowing should be struck to ensure that Scottish Water’s finances are sustainable and that customers contribute on a fair and reasonable basis to the cost of the services that they receive, prompting the questions:

Consultation Point 7: Do you agree that the Executive has identified the main factors that should have a bearing on the amount of borrowing provision made available to Scottish Water? If not, which other relevant factors should be taken into account.

Do you agree with the Executive’s analysis that to fund all enhancements to Scottish Water’s infrastructure from borrowing is unsustainable, but that to fund none would not strike the right balance between today’s charge payers and tomorrows? If so do you consider that by allowing Scottish Water’s debt to remain broadly constant in real terms would strike the right balance? If not, which level would strike the right balance and what implications would that balance have for wider public expenditure considerations?

How the costs of expanding capacity on Scottish Water’s systems should be shared among existing customers and those seeking top develop sites not served at present by Scottish Water, leading to the questions:

Consultation Point 8: Do you agree that developers should be expected to meet the cost of providing increased local capacity where this is necessary to take forward their proposed developments? If not, should all customer groups meet the cost of removing development constraints equally, or should particular customer groups be required to bear the cost? If the latter, which customer groups should bear the costs and why?

Section 3 outlines arrangements for stakeholder participation in the consultation exercise, including plans for a stakeholder conference and seminars in the late summer and early autumn.

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