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Paying for Water Services 2006-2010

INTRODUCTION

1) The Water Services etc. (Scotland) Bill includes provisions for the creation of a Water Industry Commission for Scotland. The Commission will succeed the Water Industry Commissioner for Scotland and assume a range of new functions in connection with the economic regulation of Scottish Water. The new functions will include setting limits on what Scottish Water can charge for each of the water and sewerage services that it provides to household and other customers; and approving charges schemes, consistent with these limits, that Scottish Water will prepare each year.

2) Subject to the Scottish Parliament approving the relevant provisions in the Bill, the Executive expects the Commission to be established in the summer of 2005. Until that time, the Water Industry Commissioner will remain responsible for the economic regulation of Scottish Water, and in particular for undertaking the Strategic Review of Water Charges for the period 2006-10.

3) Along with Scottish Water, the Commissioner has been required by the Executive to take forward work on the review in anticipation of the Bill taking effect. He has been required, as part of conducting the review, to publish for consultation his proposals for what the charge limits for each of the financial years in the period 2006-10 should be. These proposed limits, when taken with all borrowing by Scottish Water, are to be sufficient, but no more than sufficient, to enable Scottish Water to meet at the lowest reasonable overall cost the objectives and standards that Ministers set for it.

4) The Commissioner is to publish his proposed limits in June 2005 in the expectation that the new Commission will be in place to consider representations on them from customers, the Executive and Scottish Water between September and December 2005. The Commission will determine and publish binding limits in December 2005. These will provide the basis for Scottish Water’s charges schemes during 2006-10, with the first of these schemes coming into effect on 1 April 2006.

5) As part of these arrangements the Executive is to set out the standards and objectives that Scottish Water is to meet in the period 2006-10; and the principles that the Commission is to apply in setting charge limits and in approving charges schemes put forward by Scottish Water to pay for the achievement of these standards. The principles on charging will govern matters such as the basis upon which costs should be allocated among different customer groups, including the extent, if any, to which one group of customers should subsidise, or be subsidised by, another group of customers; and the rate at which such cross subsidies should be introduced, or withdrawn. The Executive will set out these principles in January 2005 so as to enable the Commissioner to publish his proposed charge limits in June of that year.

6) In this paper, the Executive describes, and seeks views on, the principles that it proposes to set, and how these should be applied to the charges paid by the different customer groups served by Scottish Water.

7) The paper is concerned solely with how different groups of customers contribute towards the costs of the water and sewerage services that they receive. Ministers will determine the level at which these services will be provided when they set Scottish Water’s standards and objectives for 2006-10. These are the subjects of the associated consultation paper "Investing in Water Services 2006-14 (The Quality and Standards III Project)".

8) The options outlined in the Q&SIII paper point clearly to Scottish Water continuing to spend substantially on improvements in the quality of drinking water and in the treatment and disposal of wastewater. In these circumstances, the Executive expects that the total amount of charge income required by Scottish Water will have to increase throughout the period covered by the review. The Commissioner, and later the Commission, will be responsible for ensuring that these increases are kept to the minimum necessary, but it is unrealistic to expect the review to result in anything other than increased charges generally.

9) The prospect of charges rising is a critical factor in considering what principles should apply to charges during 2006-10. By requiring particular principles to be applied at a time when charge income as a whole needs to rise, the Executive could exacerbate the impact of charge increases for some customers by requiring them to contribute towards the cost of particular cross subsidies, as well as towards the cost of meeting higher standards.

10) It is important that any change in the charging structure that results in further charge increases for particular customer groups is considered by customers generally as fair and reasonable in the wider public interest. An objective for this consultation, therefore, is to enable customers and their representatives to debate with each other and with the Executive the types of principles that would command wide ranging support across customer groups and to contribute to the development of a consensus on how the costs of water should be shared among the different groups.

11) To that end the paper outlines arrangements for a conference on 7 September which is intended to allow customers to participate in the debate directly. This conference will be followed by a series of smaller seminars whose purpose will be to look in more detail at issues of particular interest to different customer groups. These will be in addition to the opportunity to respond in writing to the proposals in the paper.

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