Principles Of Charging
The charges that customers pay provide the finance required to sustain Scottish Water’s operations and to deliver improvements to services through a programme of capital investment. The level of charges is determined through the Strategic Review process undertaken by WICS. The manner in which charges are calculated for individual customers is governed by a set of principles issued by Ministers which are known as the Principles of Charging Statement (PoC).
The draft PoC statement for 2021-27 at Annex B.
Views and comments from customers and stakeholders are sought on all aspects of the principles to ensure that these continue to be appropriate and respond to the needs of customers, whilst ensuring that Scottish Water is funded properly for the services provided.
While there has been significant continuity in the principles adopted for previous regulatory periods, changes have been made in order to improve the cost reflectiveness of charges and to remove elements of cross subsidy within the charging structure. In the present regulatory period changes have been made to the treatment of vacant properties in the non-household sector and the rateable values of properties used to assess bills. Revisions were also made to the scheme of exemption for charities and community amateur sports clubs.
The Government considers that for the most part, the statement of principles set for the present regulatory period are satisfactory and should continue for the next period. The draft statement therefore provides that charges should:
- Be Stable.
- Cover the full costs of providing services to customers.
- Be Harmonised across Scotland.
- Be Cost-reflective.
For households, the structure of charges should continue to be set by reference to Council Tax bands (as set in 2015) and charges should be collected with Council Tax bills by local authorities.
While these principles should continue, the Government considers there is a case for change in the following areas.
Proposals for Change - Addressing issues of Affordability
The Government recognises that water and sewerage services are essential to every household in Scotland and that it is important that these services not only meet the expectations of customers but also remain affordable. Ministers consider that geographical harmonisation, linking household charges to Council Tax bands and the availability of discounts and exemptions for specific categories of customers has ensured some of the most affordable water charges for low income families in Great Britain. There is, for example, no discount on water charges in England and Wales equivalent to that available to recipients of Council Tax Reduction in Scotland.
In line with Council Tax, discounts and exemptions are offered to certain categories of households depending on number and/or type of occupant. Single occupant households receive a 25% discount. Vacant properties are exempt. In addition, further discounts are applied to those in receipt of Council Tax Reduction.
Around 50% of customers benefit from one or more discounts. The overall costs of all the discounts is currently worth £146 million – about 18% of total household revenue.
The costs of these discounts is recovered through the charge structure so that customers pay more than they would were these discounts not in place.
It is important therefore that these discounts should be consistent with the principles of cost reflectivity and offer as much assistance as practicable to customers who face difficulty in paying their bills while not being an inappropriate burden on other customers. Between 10-15% of households pay more than 3% of net household income after housing costs on water charges (the commonly accepted point at which affordability constraints apply). There are families facing affordability constraints in all Council Tax bands – households in higher banded properties may pay a higher proportion of their income on water charges than those in the lowest bands.
Following examination of the discounts and discussions with stakeholders, Ministers therefore wish to consider changes to the present framework of discounts, reductions and exemptions provided for certain customers.
- The cost of the single occupant status discount is large - £85m. It is also increasing as the upward trend in single occupancy continues. Census data shows that between 1961 and 2011 Scotland’s population grew by 4.7%. However in the same timeframe, the numbers of households grew by 51%. In 1961, 14% of households were single occupants compared to 35% today. In some Local Authority areas over 40% of all households are single person.
- The cost of the exemption for vacant household properties is £20m.
- There is no service-related cost justification for providing discounts for single occupancy or for vacant properties. Whilst these properties may use less water, most costs in the industry are fixed (in the form of pipes and another infrastructure) and drainage costs are not dependent on the number of occupants.
- Many single person households do not face issues of affordability – the discount is therefore simply a subsidy to them from other customers.
- The exemption for vacant properties in the non-household sector has been removed in the current regulatory period.
Ministers therefore consider that there is a strong case for reducing or removing these discounts. They wish to consider reducing the single occupant status discount from 25% to 10% and remove altogether the vacant property exemption.
Scottish Ministers wish to consider how the additional revenue this would raise can best be used to give further assistance to those genuinely facing difficulty paying.
Ministers consider that the best option to achieve this objective would be to increase progressively the reduction given to those on full Council Tax Reduction ( CTR). Reducing the single person status discount to 10% could fund an increase in the maximum discount that those on full CTR receive from 25% to 50%. This would provide additional help for over 340,000 households on full CTR and another 160,000 on partial CTR. This proposal is simple to administer since it uses existing processes.
An alternative approach would be to introduce a specific scheme designed to reduce a household’s spending on water to 3% of disposable income. This would target households across all Council Tax bands but is administratively extremely complex – it would require a new additional process of application for relevant households. Means testing of this sort is controversial and intrusive and many families might not wish to apply for those reasons. In addition there is no appropriate agency to oversee such a process. The Government is not therefore attracted by this option.
2 Do you agree that the current Principles of Charging remain broadly appropriate for the next regulatory period?
3 Do you agree the vacant household premises exemption should be removed?
4 Do you agree with the proposal to reduce the single occupant status discount from 25% to 10%, using the revenue to improve support for customers facing affordability constraints?
Financing New Capacity
Access to water and wastewater services is fundamental to economic development.
The current arrangements through which additional capacity is added to the network to support development are complex and, by common agreement, do not provide the right incentives to ensure that asset additions are in the long-term interests of customers. Currently, developers pay no contribution towards the costs of expanding strategic assets such as treatment works, pay a £346 infrastructure charge per connection and, in most cases, are fully reimbursed for the costs of providing local infrastructure required for the development.
Over recent regulatory periods the demands of growth have in many areas, particularly in Eastern Scotland, used up all the available capacity of networks and treatment works. The industry is now facing a significant pressure to provide new capacity. For example, new wastewater treatment works are required for Edinburgh, Stirling and Perth. The total cost of this new capacity is forecast to be in the region of £250-£300 million in the period 2021-27 – a significant increase from the £110 million in the period 2015-21.
The draft PoC includes a Ministerial request to Scottish Water and WICS that a review be undertaken by the end of 2019 to:
- assess the costs of providing additional capacity to deliver Scotland’s growth plans;
- understand the incentives that the current arrangements drive and whether they lead to the correct behaviours and approaches;
- provide a comparison with other utilities across the UK; and
- provide recommendations for change that better allocate the costs and provide better levels of service to developers.
The conclusions of that review will be used to provide an updated policy on developer contributions which, following further consultation on detailed proposals, would be included in the final version of the document.
5 Do you agree that the costs of meeting the demands of growth on the water and wastewater infrastructure should be reviewed?