Investing in and paying for water services: consultation

Annex B – Principles of Charging - Final Draft

Scottish Government

General Statement of Policy - Principles of Charging for Water Services 2021-27

Scottish Ministers make the following statement of the principles that must apply to water charges for 2021-27. This statement supports the delivery of the Government's Purpose of focussing government and public services on creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable and inclusive economic growth.

The following principles will guide the Water Industry Commission for Scotland when determining the maximum charge limits with which Scottish Water must comply during 2021-27 regulatory period.

These high-level principles have been prepared in consultation with Scottish Water, the Water Industry Commission for Scotland (the Commission), the Drinking Water Quality Regulator (DWQR), the Scottish Environment Protection Agency (SEPA) and Citizens Advice Scotland (CAS) and reflect decisions taken following consultations on "Investing in and Paying for Your Water Services from 2021" published in December 2018.

Principles

Principle 1 – Stable charges

1. Ministers recognise the importance that customers attach to stability and certainty in charging. The Commission will determine charges having regard to the level of inflation, as measured by the Consumer Prices Index, that give customers certainty about the maximum level of charges they will face over the regulatory period.

Principle 2 - Full cost recovery

2. Charges should cover the full costs of providing services to customers.

Principle 3 - Harmonised charges

3. Ministers require that charges should, for similar services provided to customers of a similar category, be the same for each customer in that category regardless of location in Scotland.

Principle 4 - Cost-reflective charges

4. Charges should remain broadly cost-reflective. In particular charges for given services (for example drinking water) to particular customer groups (for example households) should be set to recover the cost to Scottish Water nationally of providing that service to that group as a whole.

Additional Requirements

Household charges

5. Ministers confirm that, in relation to unmetered households, the collection arrangements and tariff structure applying to charges in 2015-21 should continue for the period 2021-27, that is in general:

• Local Authorities will continue to bill and collect unmeasured household water and sewerage charges - Ministers will ensure that an order under section 37 of the Water Industry (Scotland) Act 2002 is in place to secure this.
• The bandings for household water and sewerage charges should replicate the council tax bandings that were in place at April 2015 and apply the discounts and reductions that apply to council tax, subject to the provision set out at Principle 6.
• The exemptions defined in the Council Tax (Exempt Dwellings) (Scotland) Order 1997 will continue to apply to water and sewerage charges, subject to the proposed provisions set out at Annex B, which relate to bringing vacant domestic properties in to charge in three specific circumstances.

6. Following a review of the appropriateness of discounts, exemptions and reductions offered to certain households, Ministers intend to raise the reduction available through the Water Charges Reduction Scheme for those in receipt of Council Tax Reduction (CTR) from 25% to 30% of the level of CTR applied to the full water and sewerage charge for the dwelling, and extend its availability to households that receive both CTR and some other form of Council Tax discount. Ministers ask that the impact of these arrangements (as proposed in Annex A below) be assessed within the period.

7. Metered and unmetered household charges should continue to include appropriate elements to recover the cost to Scottish Water of draining:

• Roofs and other impermeable surfaces from household premises; and
• those public roads that are connected to its sewers.

Business charges

8. Ministers confirm that, in relation to non-domestic charges, wholesale charges should continue to be set in line with the principles set out above and should take note of the following:

• Paying for public roads drainage - wholesale charges should continue to include an appropriate element to recover the cost to Scottish Water of draining those public roads that are connected to its sewers.
• Paying for surface drainage – wholesale charges should recover the costs to Scottish Water of dealing with rainwater that drains to Scottish Water's infrastructure from roofs and other impermeable surfaces within private properties.
• Basis for calculation – drainage charges should generally be calculated by reference to the Rateable Value as shown in the current valuation roll, though this approach will be subject to reconsideration following completion of the ongoing industry wide review. This review was requested by the Scottish Government, to consider alternatives to the current application of RV as a basis for charging, and is due to be completed by March 2021. The review has already highlighted a need for charging arrangements to adapt in the near-term, in order to address situations where customers take steps to significantly reduce their demands on Scottish Water's drainage infrastructure. Arrangements to support this initial change will be considered in early 2020 and will be confirmed in the final Principles of Charging Statement in June 2020.

9. Further consultation on the basis for charging will then follow, should any significant changes be proposed as a result of the ongoing industry wide review.

Financing

10. Ministers confirm that, in relation to the financing of Scottish Water, the following considerations should apply:

• Financial Strength – Scottish Water should be sustainably and prudently financed appropriate to the governance framework within which it operates.
• Dividend - The Government will not take a dividend from its ownership of Scottish Water.
• Lending - The Government will continue to make finance available through lending to Scottish Water in the 2021-27 period in support of its investment programme. The Government wishes to ensure that this lending is at the lowest practicable level consistent with the principle of stable charges. Ministers will provide the amount advised by the Commission, up to a maximum of £1.02 billion during the period.
• Financial Performance - Financial performance in relation to ongoing operating and refurbishment costs should be considered in line with the financial tramlines as set out by the Commission. Scottish Water should provide stakeholders with separate assurance relating to expected and delivered capital expenditure. This will ensure that Customers will only be asked to meet additional costs beyond those allowed for in a charges determination where these arise as the result of external factors beyond the influence of Scottish Water. This arrangement protects the position of customers and ensures that they do not compensate Scottish Water for inefficiency or poor management. Any financial outperformance will be deployed in line with Ministers' decisions.

Providing additional capacity in network assets to support development

11. Following a review of the appropriateness of existing arrangements associated with paying for additional capacity, Ministers propose that the following revised arrangements are introduced, subject to the detailed provisions set out at Annex C below:

• Existing Network Assets - At present the costs of enhancing existing network assets to meet the needs of new housing development and the domestic requirements of commercial and industrial developments that cannot be attributed to individual developments are financed from developers, generally through Infrastructure Charge revenues, while enhancements that are required to support individual developments are covered by reasonable cost arrangements.

To simplify these arrangements it is proposed that the costs of all enhancements to existing network assets to meet the needs of all new housing development and the domestic requirements of commercial and industrial developments should be met through Infrastructure Charges, up to a maximum limit. Under these proposals individual developers would be required to meet additional costs above the maximum limit.

Scottish Water and the Commission would agree the maximum limit referred to above and the appropriate level of Infrastructure Charges, to ensure that the provision of additional capacity in existing network assets is financed by developers generally.

In relation to housing development, Infrastructure Charges would continue to be levied for each dwelling to be connected to Scottish Water's water services and for each dwelling to be connected to Scottish Water's sewerage services.

For non-household development, it is proposed that Infrastructure Charges would be levied on an equivalent dwelling basis for each premises to be connected to Scottish Water's water services and for each premises to be connected to Scottish Water's sewerage services.

• New Network Assets – At present the costs of providing new development specific network assets and enhancing existing network assets to meet the needs of individual new housing developments and the domestic requirements of individual commercial and industrial developments are covered by reasonable cost arrangements.

The proposals relating to Existing Network Assets (above) would mean that, going forwards, only the costs associated with providing new development specific network assets would be included in reasonable cost assessments.

Should these changes proceed, Scottish Water and the Commission will assess the effectiveness of these revised arrangements during the period.

Assistance for Charitable organisations

12. Ministers recognise the contribution that charities make to Scotland's well-being and prosperity and confirm that the scheme implemented for the 2015-21 period is to be continued. This Scheme will provide an exemption or a reduction on water and sewerage charges payable by charities or Community Amateur Sports Clubs subject to the conditions set out in Annex D below. This scheme is to be funded by the generality of non-household customers.

Paying for regulation and customer representation

13. Ministers confirm that the cost of economic regulation and customer representation should be covered by an annual levy on Scottish Water funded out of charge income.

14. Ministers confirm that the costs of the Drinking Water Quality Regulator in regulating Scottish Water's core functions should be funded out of charge income.

15. Ministers confirm that the costs of the Scottish Environment Protection Agency (SEPA) in regulating Scottish Water should be funded from charges levied by SEPA in accordance with its charging regime.

Preparing for Future Regulatory Periods

16. Ministers require that preparatory work be undertaken for the 2027-33 period. The charging policies as contained within this document will be reviewed to ensure that they meet the Government's overall policy priorities.

Annex A

Reductions to apply to water and sewerage charges at unmetered Households

Following a review of the appropriateness of discounts, exemptions and reductions offered to certain dwellings against unmeasured household water and sewerage charges, Ministers are proposing to amend the Water Charges Reduction Scheme (WCRS) which is currently awarded to dwellings that receive Council Tax Reduction (CTR), but do not receive any other Council Tax Discounts.

The proposal is to:

• increase the maximum level of support provided by WCRS to 30% of the level of CTR; and
• extend WCRS eligibility to include all dwellings that receive CTR, so that dwellings that receive CTR will pay the lesser of:
  • the full water and sewerage charges for the dwelling less any status discounts awarded for Council Tax, or
  • the full water and sewerage charges for the dwelling less a reduction through WCRS equivalent to 30% of the level of CTR awarded for Council Tax.

Subject to further consultation, the proposed changes will be reflected in the final document.

Reductions to apply to water and sewerage charges at unmetered Households

1. Reductions to water and sewerage charges at unmetered dwellings should apply in relation to dwellings (where "dwelling" has the same meaning as in part II of the Local Government Finance Act 1992) where all the following circumstances apply:-

a. A person is liable to pay water and/or sewerage charges under a charges scheme;

b. CTR applies; and

c. The dwelling in respect of which the charges are payable is not one to which the Council Tax (Discount for Unoccupied Dwellings) (Scotland) Regulations 2005 apply.

2. Where the dwelling is subject to a Council Tax discount under section 79 of the Local Government Finance Act 1992, the discounts to be applied to unmetered water and sewerage charges shall be the same as those applied to Council Tax charges.

3. If a person receives CTR in respect of the dwelling, the following formula should be used to calculate the level of reduction for which that dwelling is eligible.

R = 30 x A ÷ B

Where:

• R is the percentage discount to be applied to unmetered water and/or sewerage charges;
• A is the amount of CTR which a person receives in respect to that dwelling in that year; and
• B is the council tax for which that person is liable in respect to that dwelling in that year.

4. Dwellings are only eligible to receive one discount or reduction on unmetered water and sewerage charges. Therefore, where the dwelling is subject to a Council Tax discount under section 79 of the Local Government Finance Act, and that dwelling also receives CTR, it will be awarded the discount or reduction which results in the lowest level of water and sewerage charges.

5. No discounts or reductions in water charges should be applied for 2nd homes, or to dwellings supplied through a water meter.

Annex B

Exemptions from water and sewerage charges for unmetered dwellings

1. Following a review of the appropriateness of discounts, exemptions and reductions offered to certain dwellings against unmeasured household water and sewerage charges, Ministers confirm that the following exemptions, defined in the Council Tax (Exempt Dwellings) (Scotland) Order 1997 (as amended), will not apply to water and sewerage charges in 2021-27:

• New dwellings - An unoccupied and unfurnished dwelling in respect of which—
  • less than 6 months have elapsed since the effective date for the first entry in the valuation list; and
  • there was no entry in the valuation roll immediately prior to that effective date.
• Empty dwellings - A dwelling—
  • which is both unoccupied and unfurnished; and
  • in respect of which less than 6 months have elapsed since the end of the last period of 3 months or more throughout which it was continually occupied or furnished.
• Dwellings under repair - An unoccupied dwelling–
  • which–
    (i) is undergoing or has undergone (since the last occupation day) major repair work to render it habitable; or
    (ii) is undergoing or has undergone (since the last occupation day) structural alteration;
  • in respect of which no more than 12 months have elapsed since the last occupation day; and
  • in respect of which no more than 6 months have elapsed since the major repair work or structural alteration in question was substantially completed.

2. All other exemptions defined in the Council Tax (Exempt Dwellings) (Scotland) Order 1997 (as amended), will apply to water and sewerage charges in the 2021-27 period.

Annex C

Providing additional capacity in network assets to support development

Scottish Water operates separate water and sewerage assets to provide dwellings, businesses and industrial premises with water and sewerage services.

Water network assets transport water from water treatment works to customers' premises and include water mains, pumping stations and tanks for storing treated water. Homes, businesses and industrial premises are connected to water mains by communication pipes.

Sewerage network assets collect sewage, surface water (rainwater) and trade effluent from customers' premises, and include sewers, sewerage pumping stations, storm overflows and sustainable urban drainage systems (SUDS). Some sewers only collect rainwater, some only carry waste from premises, while others carry both waste and rainwater. Homes, businesses and industrial premises are connected to sewers by pipes referred to as sewer tails.

Following a review of the arrangements associated with paying for additional capacity to support development, Ministers are proposing to introduce revised arrangements, as set out below.

• Existing Network Assets - At present the costs of enhancing existing network assets to meet the needs of new housing development and the domestic requirements of commercial and industrial developments that cannot be attributed to individual developments are financed from developers generally through Infrastructure Charge revenues, while enhancements that are required to support individual developments are covered by reasonable cost arrangements.

To simplify these arrangements it is proposed that the costs of all enhancements to existing network assets to meet the needs of new housing development and the domestic requirements of commercial and industrial developments should be met through Infrastructure Charges, up to a maximum limit. Under these proposals individual developers would be required to meet additional costs above the maximum limit

Scottish Water and the Commission would agree the maximum limit referred to above and the appropriate level of Infrastructure Charges, to ensure that the provision of additional capacity in existing network assets is financed by developers generally.

In relation to housing development, Infrastructure Charges would be charged for each dwelling to be connected to Scottish Water's water services and for each dwelling to be connected to Scottish Water's sewerage services.

Under the current arrangements for non-household development, Infrastructure Charges are applied for each new premises to be connected, irrespective of the demand the premises will place on Scottish Water's water and sewerage services. It is proposed that in future, for non-household development, Infrastructure Charges would be levied on an equivalent dwelling basis for each premises to be connected to Scottish Water's water services and for each premises to be connected to Scottish Water's sewerage services.

• New Network Assets – At present the costs of providing new development specific network assets and enhancing existing network assets to meet the needs of individual new housing developments and the domestic requirements of commercial and industrial developments are covered by the Reasonable Cost arrangements.

In line with the proposals outlined above, only the costs associated with providing new development specific network assets would be included in reasonable cost assessments.

Should these changes proceed, Scottish Water and the Commission will assess the effectiveness of these revised arrangements during the period.

• Non-network assets -Scottish Water shall continue to provide capacity in all other assets to meet the needs of new housing development and the domestic requirement of commercial and industrial developments.

Annex D

Assistance for Charitable organisations

1. Ministers confirm that there is to be a scheme to assist charities with the payment of water and sewerage charges. Assistance is to be provided to an organisation which meets the following criteria:

It is either registered:

• with the Office of the Scottish Charity Regulator as a charity; or
• with HMRC as a Community Amateur Sports Club (CASC) operating in Scotland.

2. Where it has a gross annual income of less than £200,000, as disclosed in its most recent set of accounts submitted to the relevant regulatory body, it will be exempt from the payment of water and sewerage charges.

3. Where it has a gross annual income of £200,000 or more, but less than £300,000 it will be eligible for a 50% reduction in wholesale water and sewerage charges. Water and sewerage retail charges will be subject to a cap to be determined by the Water Industry Commission for Scotland.

4. Other conditions:

(a) Any eligible charity or CASC seeking exemption or a reduction must:

• Apply to their Licensed Provider; and
• Renew their request for exemption annually.

(b) Where organisations are awarded charity or CASC status, exemption or a reduction will be granted from the date upon which charity or CASC status is awarded.

(c) Exemption or a reduction will only be awarded where the records held by OSCR or HMRC are up to date and in line with the regulator's expectations.

(d) Charities or CASCs in possession of permanent alcohol licence will not qualify for assistance.

(e) Charities or CASCs which operate a full-time retail outlet will not qualify for assistance.