Investing in and paying for water services: consultation

The Strategic Review of Charges

The Strategic Review of Charges is the process undertaken by the Water Industry Commission for Scotland (WICS) – the independent economic regulator of Scottish Water – which determines the charges payable by Scottish Water's customers for the next regulatory period.

The Strategic Review of Charges for 2021-27 will be the sixth undertaken in the Scottish water industry. Ministers initiated the review by means of an official letter to the WICS in January 2017. This set out the initial policy framework and timetable for the Review.

A revised letter was issued to the WICS in June 2019 (see Annex A), which reflected a number of developments in the approach being taken to the Strategic Review. This included taking account of the findings of the initial 2018 consultation on the Principles of Charging and Objectives, and asking the industry to develop and work towards a coherent vision, describing the long term nature of the industry and what it can achieve.

A timetable, showing the key updated dates for the Strategic Review, is included below.

Commissioning Letter to (WICS)	January 2017
Publication of WICS methodology	April 2017
Publication of Draft Scottish Water Strategic Projections	March 2018
Draft Principles of Charges	Summer 2018
Draft Objectives	Summer 2018
Publication of WICS methodology refinements and clarifications	November 2018
Scottish Water shares its outline Strategic Plan with water industry stakeholders	December 2018
Final Draft Principles of Charges*	January 2020
Final Draft Objectives*	January 2020
Scottish Water's co-created Strategic Plan finalised	January 2020
WICS Draft Determination	May 2020
Final Principles of Charges	June 2020
Final Objectives	June 2020
WICS Final Determination	September 2020
Start of New Regulatory Period	April 2021

* These documents are the subject of the present consultation

A significant amount of work has already been undertaken by WICS and by Scottish Water, which included the publication of the revised methodology document in November 2018 and a number of 'Decision Papers', which offer WICS' views on issues key to the review.

Ministerial Inputs

Scottish Ministers make 2 specific inputs to the Statutory Review in the form of statements which set out:

• the Principles that should underpin charges for water services, (known as the Principles of Charging statement); and
• the Objectives which define the standard of services to be delivered in the 2021-27 period.

The Scottish Government wishes to ensure that the policy framework takes full account of the views and concerns of customers and stakeholders. This consultation therefore seeks views on the final drafts of these documents, particularly around the Principles of Charging statement, which now includes a number of changes to address issues highlighted in the 2018 consultation.

Responses to this paper will complement other processes of the Strategic Review, including the work of the Customer Forum and Scottish Water's own engagement and research. Together these activities will ensure that the widest range of customer views is available to inform Ministers' decisions on the final documents.

These documents will be issued in their final form in June 2020.

Policy Framework

The following features of the policy framework have been key to previous regulatory periods and the Government considers that they remain appropriate.

Charges for Customers - Charges for all customersshould ensure the sustainable funding of the water industry, whilst remaining affordable and broadly stable.

Size and Nature of the Investment Programme - Overall, investment priorities must support the Scottish Government's core purpose of creating a more successful country, with opportunities for all of Scotland to flourish. In particular, the investment programme should:

• Be developed such thatthe industry's capacity for investment is recognised and efficiency of delivery is optimised.
• Be programmed in a manner so as to avoid excessive peaks and troughs in investment.
• Include the development of well-informed plans for asset repair, refurbishment and replacement, to ensure the continued serviceability of Scottish Water's assets.

Government Financing - Scottish Water is financed from customer charges and borrowing from Government. For planning purposes, it should be assumed Ministers will provide the annual amount advised by WICS, up to a maximum of £1.02 billion across the 2021-27 period. This will be confirmed in the final Principles of Charging Statement when it is published in June 2020.

Looking Beyond the Regulatory Period

The Scottish Government considers that the present 6 year regulatory period has proved effective in improving long-term planning for the industry and its supply chain; and giving customers certainty of pricing over a number of years. WICS have therefore been asked to determine prices for the 6 year period, covering 2021-27.

The Government is also aware of significant longer term challenges facing the industry – many of which were identified and analysed in Scottish Water's Strategic Projections (February 2018). Significant among these is the need to plan for the replacement of major assets in the years ahead and to respond effectively to the climate emergency.

The need for rising levels of investment has been demonstrated in the detailed work undertaken by WICS, Scottish Water and other stakeholders. To guide that investment, a long term water sector vision has been co-created to describe the future industry that the Scottish Government, Scottish Water and other stakeholders are working together to build.

Water Industry Vision

Scotland's water sector will be admired for excellence, secure a sustainable future and inspire a Hydro Nation.

Together we will support the health and wellbeing of the nation. We will ensure that all of Scotland gets excellent quality drinking water that people can enjoy all of the time. Scotland's wastewater will be collected, treated and recycled in ways that generate value and protect the environment. We will enable the economy to prosper.

We will transform how we work to live within the means of our planet's resources, enhance the natural environment and maximise our positive contribution to Scotland achieving net zero emissions.

We will involve and inspire Scotland's people to love their water and only use what they need. We will promote access to the natural environment and encourage communities to enjoy and protect it.

We will be agile and collaborate within the sector and with others to be resilient to the challenges which will face us. We will keep services affordable by innovating and delivering the greatest possible value from our resources, helping those who need it most. We will serve all customers and communities in a way that is fair and equitable to present and future generations.

We are a vital part of a flourishing Scotland.

The Vision is included as an Addendum to the final draft Investment Objectives.

The Government is keen to avoid shocks to customer charges over future periods as these longer term challenges are addressed. It has therefore asked WICS to give indicative profiles of prices for subsequent regulatory periods in the light of the developing understanding of continuing investment requirements.