Investing in and paying for your water services from 2021: consultation

Annex B: Principles of Charging

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 ( SW) must comply during 2021-27 regulatory period.

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 SW nationally of providing that service to that group as a whole. They recognise that charges for particular services such as developer connections may have to change in the light of the reviews instructed in this document.

Additional Requirements

Household charges

5. Ministers confirm that, in relation to unmetered households, the collection arrangements and the 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 council tax bandings as set in 2015 and apply the discounts that apply to council tax subject to the provisions below.
• In line with Ministers’ principle on cost reflective charging (5 above) Ministers confirm that they intend to examine, through a separate consultation, the appropriateness of discounts and exemptions offered to certain households. They propose that support for low income households should be improved as a consequence of any changes.
• Subject to the outcome of the consultation, reductions related to Council Tax Reduction applied to water and sewerage charges will remain, as a minimum, in line with the provisions set out at Annex A to this statement.

6. Full-time students will remain exempt from water and sewerage charges. Furthermore, purpose-built student accommodation is only brought into charge whilst it is not occupied solely by full-time students studying at a Scottish University or College.

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 be calculated by reference to the Rateable Value as shown in the current valuation roll. A separate industry review of alternative methods is on-going and any proposal to change the current methodology would be subject to further consultation.

Financing

9. Ministers confirm that, in relation to the financing of SW, the following considerations should apply:

• Financial Strength - SW 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 SW.
• Lending - The Government will continue to make external finance available through lending to SW in the 2021-27 period in support of its investment programme.. Ministers will provide no less than [sum to be determined] per annum.
• Financial Performance - Financial performance should be monitored in line with the financial tramlines as set out by the Commission. These will also 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 SW. This arrangement protects the position of customers and ensures that they do not compensate SW for inefficiency or poor management. Any financial outperformance will be deployed in line with Ministers’ decisions.

Paying for capacity

10. Ministers request that a review be undertaken into the arrangements for paying for additional capacity to ensure that the apportionment of costs between current and future customers is consistent with Principle 4 above. The review should consider the costs of:

• Extending local infrastructure to enable new developments to be connected to the public networks to ensure that the reasonable cost contribution made by current customers is appropriate;
• Strategic network upgrades required to connect new developments and to ensure that the infrastructure charge paid by developers is set to recover the costs incurred.
• Upgrading strategic infrastructure such as treatment works.

This review is to be completed in 2019. The conclusions of this review will be reflected in the final statement.

Assistance for Charitable organisations

11. Ministers recognise the contribution that charities make to Scotland’s well-being and prosperity and confirm that the scheme implemented for 2015-21 period is 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 B. This scheme is to be funded by the generality of non-household customers.

Paying for regulation and customer representation

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

13. 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.

14. Ministers confirm that the SEPA’s costs in regulating Scottish Water should be funded from charges levied by SEPA in accordance with SEPA’s charging regime.

Preparing for Future Regulatory Periods

15. 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.

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Annex A

Reductions to apply to water and sewerage charges at unmetered Households

The following text is taken from the present Principles of Charges which apply for the period 2015-21.

Ministers are proposing changes to this framework to remove the exemption for vacant households and to reduce the single occupant status discount. They are also proposing to raise the discount for recipients of Council Tax Reduction.

Subject to further consultation these changes will be reflected in revised text.

1. Reductions to water and sewerage charges at unmetered households 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; and

b. 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. If there is no such discount under section 79, but a person receives Council Tax Reduction in respect of the dwelling, the following formula should be used to calculate the level of reduction for which that dwelling is eligible.

R = 25 x A ÷ B

Where:

R is the percentage discount to be applied to water and/or sewerage charges;

A is the amount of Council Tax Reduction 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.

3. No reduction in water charges should be applied for 2nd homes, vacant homes or to dwellings supplied through a water meter.

Annex B

Assistance for Charitable organisations

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.
• 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.
• Where it has a gross annual income of more than £200,000 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.

Other conditions:

1. Any eligible charity or CASC seeking exemption or a reduction must:

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

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

3. 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.

4. Charities or CASCs in possession of permanent alcohol licence will not qualify for assistance.

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