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PRINCIPLES OF CHARGING FOR WATER SERVICES 2010-2014 – DRAFT STATEMENT

DescriptionThe following charging principles are those that Scottish Ministers expect the Water Industry Commission for Scotland to apply during 2010-14. These are set under section 29D of the Water Industry (Scotland) Act 2002 and will guide the Commission when setting the charge limits that Scottish Water is able to levy during 2010-14.
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Website Publication DateMay 30, 2008

PRINCIPLES OF CHARGING FOR WATER SERVICES 2010-2014 - DRAFT STATEMENT

The following charging principles are those that Scottish Ministers expect the Water Industry Commission for Scotland ("the Commission") to apply during 2010-14. These are set under section 29D of the Water Industry (Scotland) Act 2002 and will guide the Commission when setting the charge limits that Scottish Water ("SW") is able to levy during 2010-14.

Stable charges

1. Ministers recognise the importance that customers attach to stability and certainty in charging. The publication of charges limits at the conclusion of the Strategic Review of Charges will give customers certainty about the level of the charges they will face over the life of the regulatory period. Ministers specified essential and desirable objectives for Scottish Water for 2006-14 and are in the process of reconfirming the objectives for 2010-14. Subject to that confirmation, Ministers require that Scottish Water be funded to deliver all of the essential objectives that fall due in the 2010-14 period and that the Commission makes provision for the desirable objectives in order of priority to the extent that:

  • it is reasonable to expect that they can be delivered efficiently;
  • and without projected charges to customers in the period to 2014 rising by more than the level of inflation.

Ministers request the Commission to advise them if stability of charging is not achievable, so that they can decide the appropriate action to take.

Full cost recovery

2. Charges should cover costs - public expenditure support to SW will take the form solely of lending from Ministers. In addition, 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 pay twice for the same service or compensate the company for inefficiency or poor management.

Cost reflective charges

3. Charges in general should be broadly cost-reflective - i.e. charges for given services to particular customer groups should be set to recover the cost to SW nationally of providing that service to that group as a whole. The principle of affordable charges for low income households should be an exception to this.

Phasing of increases

4. Ministers recognise that achieving stable charges in real terms could mean that some charges for individual customers will rise above inflation and others will fall. In particular this could arise in those circumstances where some tariff rebalancing is justified i.e. to correct any historic under charging where the cost to serve has been found to be greater than present charge levels.

5. Ministers wish to ensure steady progress to be maintained in removing cross subsidies from the charging framework.

6. Where charge increases are expected for individual customers as a result of any such rebalancing, Ministers general expectation is that the Commission will do so over the review period. However, they invite the Commission where they identify disproportionate impacts on customers, in light of the wider circumstances they face, to consider whether it would be appropriate to extend any transition period to cover two full regulatory periods - i.e. to 2018.

7. While Ministers fully support the move to cost reflective charging they recognise that the implications of the unwinding of cross subsidies may be significant for individual business customers or sectors. They will study closely the evidence that emerges from the pricing review as it progresses so that if there is disproportionate impact on the continuing competitiveness of particular sectors, they can consider what other actions outside the price review that may be taken to address this.

8. Following its final determination of charges, Ministers request that the Commission consult with SW, licensed providers and customers on the best approach to unwinding the identified cross-subsidies - recognising that the benefits to some businesses of cross-subsidies are paid for by other businesses and public sector organisations. The consultation should identify clearly the extent of the likely increase for different classes of customer.

Harmonised charges

9. A fundamental tenet of Ministers' policy regarding charges is that customers in the same group should pay at the same rate for the provision of the same service, regardless of their location, or of the actual cost of serving one such customer as against another. Section 29D(2) of the 2002 Act enshrines this principle in statute by requiring Ministers to set policy regarding charges that secures that outcome. Consequently, Ministers confirm that charges for all of SW's core services in the period must be recovered from customers on the basis of all tariffs being set at a nationally averaged rate for Scotland as a whole. This means that charges in respect of given services to particular customer groups should be set to recover the cost to SW nationally of providing that service to that group as a whole.

Financing and capital expenditure

10. Ministers' policy is that SW's financial strength should not be undermined, is appropriate given the governance framework within which it operates and therefore levels of borrowing should be consistent with long-term financial sustainability.

11. In determining charges, the Commission should determine the amount of lending required by SW for each year of the period 2010-14 to support the investment programme. The Scottish Government confirms that it will not take a dividend from its ownership of SW and financial outperformance should be used to build up a financial reserve.

12. Ministers believe that it is important that the capital investment programme for the 2010-14 period is no larger than can be delivered efficiently, and following the research published by the Commission, propose that the maximum level should be in the region of £2bn over the 2010-14 period - i.e. £500m per year on average. Ministers request that the Commission advise them if it believes that the size of the capital programme is likely to exceed this amount.

Household charges

13. The Government is committed to the abolition of Council Tax and its replacement with a local income tax and has issued a consultation on its proposals in this area. This change has a number of important implications for water charges;

  • domestic water charges are currently set with reference to council tax bands;
  • local authorities currently bill and collect water charges on behalf of Scottish Water together with Council Tax, and;
  • water customers receive a range of discounts by virtue of the link with the present Council Tax system.

14. Ministers continue to regard the issue of affordability as significant and propose to explore how the present benefits can be maintained during 2010-14.

Paying for public roads drainage

15. SW household and wholesale charges should continue to include an appropriate element to recover the cost to SW of draining public roads.

Paying for increased local capacity

16. Where enhancements to the local infrastructure are required to enable new developments to be connected to the public networks, developers should meet the net cost to SW of such enhancements. Ministers also require the Commission to continue to provide for SW to levy infrastructure charges for each new property connected to the water or sewerage infrastructure.

Surface drainage charging arrangements for non-household customers

17. Ministers request that SW work with licensed providers and the Central Market Agency (CMA) to enable customers to fully understand the planned changes to the basis for surface drainage before this change takes effect from 2010. Specifically customers should be provided with information detailing the surface area that has been assigned to their premises and the consequential charge band, a mechanism to challenge the charge band if the assigned area is inaccurate and to understand the potential impact on their bill.

Small organisation exemption scheme

18. Ministers confirm that the exemption scheme is to be extended in its present form until 2014.

Paying for economic regulation and customer representation

19. Ministers confirm that the cost to the Commission of regulating SW and the cost to Waterwatch of providing customer representation should be covered by an annual levy on SW funded out of charge income.