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PAYING FOR WATER SERVICES 2010-14 - A CONSULTATION ON THE PRINCIPLES OF CHARGING FOR WATER SERVICES – CONSULTATION ANALYSIS

DescriptionThe Scottish Government published a consultation in November 2007 on Ministers’ proposed charging principles for the forthcoming regulatory period 2010-14, responses to which are the subject of this analysis.
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Official Print Publication Date
Website Publication DateMay 30, 2008

PAYING FOR WATER SERVICES 2010-14 - A CONSULTATION ON THE PRINCIPLES OF CHARGING FOR WATER SERVICES - CONSULTATION ANALYSIS

Introduction

1. For any given period, water and sewerage charges are set following a process of review and decision making, known as the Strategic Review of Charges. This is commissioned by Scottish Ministers and undertaken by the Water Industry Commission for Scotland ("the Commission").

2. A key Ministerial input to this process is the setting of the binding charging principles that Ministers require the Commission to apply when setting the charge limits that Scottish Water ("SW") is able to levy over a regulatory period.

3. The Scottish Government published a consultation in November 2007 on Ministers' proposed charging principles for the forthcoming regulatory period 2010-14, responses to which are the subject of this analysis.

4. The 2010-14 Principles of Charging consultation closed on 29 February 2008 and 535 responses were received from a variety of individuals and organisations. These included business forums, educational and religious institutions, local authorities, public sector organisations and private companies.

5. The intention is that the Commission will apply these charging principles when setting charges for the 2010-14 period. The charging principles will apply to final charge levels for household customers (i.e. wholesale and retail charge elements) but to wholesale charges only for non-household customers. With the introduction of retail competition from 1 April 2008, it will be for individual retailers to decide how they charge non-household customers for the services provided.

Essential Principles of Charging

6. Respondents were overwhelmingly supportive of the broad proposals to continue the essential charging principles identified in the consultation. These principles included full cost-recovery, cost-reflectivity, geographical harmonisation of charges, phasing of increases and paying for increased local capacity. Particular points raised here were:

Stable and affordable charges

  • There was a clear message that fair, affordable, stable and transparent charges should be maintained.
  • This type of mid/long term charging regime was regarded as vital to the success of the water industry.
  • Consideration should be given to incentivising the protection of the environment - e.g. to encourage a reduction in pollutants, efficient water use and to reflect low volume water usage.

Harmonised charges

  • There was overwhelming support for this principle while it was recognised that this is a form of cross-subsidy.

Cost-reflectivity

  • That the phasing of any charge increases was regarded as a vital element of cost-reflective charging (see paragraph 16 on cost-reflectivity).
  • Some respondents expressed the view that full cost-recovery should however be achieved over the 2010-14 regulatory period.
  • There was some agreement with the polluter pays principle.
  • Some respondents questioned whether existing customers should make up the deficit through their charges of any historic under-investment.

Phasing of Increases

  • There was unanimous support for phasing of any charge increases, particularly where these are above inflation.
  • It was recognised that in order to achieve cost-reflective charges in certain areas, charges would need to be increased. In these circumstances a phased approach which was least disruptive to customers was favoured.
Enhancements to local infrastructure
  • The majority of respondents agreed that developers should pay for increased local capacity, and that this should be kept under review.
  • On the other hand some respondents considered that major projects, such as Glasgow's sewer infrastructure, could be co-funded by local authorities, enterprise agencies and Government.

Scottish Water's investment programme

7. There was wide consensus that Scottish Water's investment programme, while ambitious, should be set at a level that is efficiently manageable by it. It was recognised that the benefits of the current programme have already been considerable. There was an acknowledgement that any early difficulties with the current programme has improved and that the significant benefits of this long-term planning will be realised in the future. Many respondents considered that the Outputs Monitoring Group (OMG) has proved an effective planning forum.

8. Some respondents considered that the construction industry has shown that it is capable of handling a large investment. These respondents also highlighted support that the programme has given the construction industry. It was considered that the experience of the current programme bodes well for the 2010-14 programme.

9. One criticism of the current capital programme was that the ambitious levels of 2006-10 had resulted in higher charges to customers. For 2010-14 the impact of the size of the programme should be considered against charge levels. It was also proposed that the investment programme should include a significant element for leakage control and flooding projects.

Finance

10. Many respondents considered, for the regulatory period 2010-14, the financial sustainability and resilience of Scottish Water, together with appropriate borrowing were key components to its continued success. It was seen as important that the borrowing made available to SW would not compromise the ability of its senior management to make long-term infrastructure decisions. Some respondents thought that any financial under-performance by SW should be met by the Scottish Government.

11. Some concern was expressed about the future availability of Scottish Government loans given tighter financial constraints. The mutualisation or privatisation of SW to enable access to private sector capital was suggested by one respondent as an alternative approach to be taken in these circumstances.

12. The setting up of a 'gilts buffer' was seen as a prudent measure by some respondents - on the basis that an appropriate level would be established once performance had been assessed. One respondent questioned the concept and suggested that appropriate safeguards, in particular relation to the sale of gilts, be put in place.

13. One respondent was unconvinced that the Regulatory Capital Value (RCV) method used in England and Wales and applied in Scotland by the Commission is an appropriate method. Their view is that the regulator uses RCV to ensure a 'fair' return to the investor and this leads to expenditure on repairs being disincentivised while new projects which earn maximum profits are incentivised.

14. Some respondents sought clarification about who should fund maintenance of Sustainable Urban Drainage Schemes given their increased significance.

Affordability and the impact of moving from council tax to a local income tax

15. There was widespread agreement that the issue of affordability is significant. Some views were expressed that consideration should be given to extending the current 25% water charge discount, available to low income households with two adults or more, to 100% to align with similar council tax benefit provision. Other respondents stated that domestic affordability issues should remain a priority and arrangements should be put in place to avoid a debt burden on vulnerable customers. There was also some criticism of the lack of clarity and consistency in the collection of debt by local authorities.

Unwinding of cross-subsidies between customers

16. While respondents expressed wide support for the cost-reflectivity principle, an area of concern highlighted by several respondents was the increase in trade-effluent charges that could result. Some respondents feared this could lead to some customers adopting 'in-house' solutions which could lead to overall revenues to SW falling. Consequently, there was some support for the phasing of any charge increases in this area over a reasonable period. It was also proposed that any further charging changes in the trade-effluent area should be deferred until the full effects of the planned changes from 2010 to the basis for charging for surface drainage are known.

17. While generally supported, some respondents suggested that any further unwinding of cross-subsidies between household and non-household customers should be handled with care. There was also some support for the continuation of discounts formerly available to large volume user customers (LUVA tariffs). On the other hand some respondents were in favour of rigid implementation of cost-reflective charging.

18. Further general comments were that consideration should be given to sheltered housing being classed as household as opposed to non-household to move this outwith the business charges regime.

Small organisation water services charges exemption scheme

19. The question of the continuation or otherwise of the scheme generated a considerable number of responses from religious organisations and from village halls who wished to see the Exemption Scheme retained. Some respondents stressed that village and church halls are generally low volume water users (premises are often only open on a limited basis) and highlighted the significant role in the fabric of local and rural life. They considered that removal of the Exemption Scheme would not only place a financial burden on the owners, but also on the users, of premises as the cost would inevitably have to be passed on. Some respondents also stated that the vast majority of users of church and community halls operate on very limited budgets and imposition of the additional costs relating to water charges could result in the closure of premises.

20. Several respondents considered that the importance of the contribution voluntary and charitable organisations made to local services should be recognised and that the present annual cost of the scheme to customers (around £3 million) was insignificant in relation to a business such as SW. However some respondents took the view that all customers should contribute to their water and sewage services.

21. Several Respondents considered that the Scheme, in its existing form, did not achieve its original objectives and suggested a number of amendments to the qualifying criteria. These included

  • extending scheme to all charities registered with the Office of the Scottish Charities Regulator;
  • increasing the £50,000 threshold to £70,000/£75,000;
  • reconsideration being given to the liquor license criteria;
  • the inclusion of new premises that could meet the eligibility criteria, and;
  • the method for calculating the 'net income' should be reviewed.

22. Alternatives proposals were also submitted on how the scheme should be funded, for instance by central government. Additionally proposals were submitted for an entirely new scheme based on charitable status whereby those organisations which met the criteria established by the Charities and Trustee investment (Scotland) Act 2005 would qualify for exemption.

23. Some respondents requested that, in the event that charging is implemented for organisations that presently receive exemption, a fair and affordable tariff structure is developed. It was suggested that one possibility could be to reduce any high standing charges associated with charging for water services on a metered or measured basis.

Public roads drainage

24. This subject generated a number of responses, the majority of which expressed the view that the basis for calculating public roads drainage should not be linked to the rateable value of premises. It was suggested that further work be undertaken to look at alternatives. Conversely, some respondents however considered that the status quo should be maintained.

25. Some respondents suggested that responsibility for public roads drainage charging should lie with the roads authorities, particularly as the Northern Irish administration had apparently recently introduced arrangements along these lines.

26. Some respondents suggested that there should be some adjustment to the method for calculating roads drainage e.g. the charge should only apply to the amount of the facility bordered by highways drained by Scottish Water and that the highways authorities should cover the remainder.

Other issues

Metering

27. While not the direct subject of the consultation, the consultation generated a number of responses about changes underway to the basis of charging non-household customers. These include the introduction of general metering by 2009 and a revised system of charging for surface and private roads drainage by 2010.

28. The consultation further underlined the broad support (previously borne out in the 2004 "Paying for Water Services" consultation and the 2006 "Non-household Charging Consultation") for the introduction of general non-household metering. It was recognised that the level of the fixed charges associated with metering could have a major impact on charge levels for individual customers. Consequently, there was some support for lower fixed charges to low volume users.

29. Some issues were also raised about arrangements for those non-household premises which would not have meters installed in time for the opening of the retail market on 1 April 2008 and also where meter installation is generally considered impractical. Some respondents considered that SW's methodology for calculating water charges, in either of these circumstances, should be clear and transparent. It was considered that a banded water charging approach, along the lines proposed for the surface drainage proposals, should be adopted in these circumstances.

30. Some respondents questioned the financial viability of installing meters in premises where water usage is low. Some respondents also questioned the legislative basis for the compulsory introduction of meters. Others considered that metering should be extended to the domestic sector to encourage better use of water.

Surface and private roads drainage

31. Again, consistent with responses to past consultation exercises on the subject, there was wide support for the move to a banded system of charging for surface area drainage. Several respondents, particularly charitable, voluntary and sports organisations which invariably operate on limited budgets and whose premises and grounds often cover significant areas, were concerned about the detail of the scheme.

32. Consequently, there was some support for further information from Scottish Water on the final detail of the scheme. Some respondents thought that consideration should be given to ability to pay and that a robust appeals process should be introduced.

Scottish Government conclusions

33. The Scottish Government will publish its conclusions to the consultation in the form of Scottish Ministers draft principles of charging statement.

Acknowledgements

34. The Scottish Government would like to take the opportunity to thank those who responded to this consultation.

Climate Change & Water Industry Directorate

May 2008