Water services - investing in and paying from 2027: consultation

6. Consultation on the Principles of Charging

Customer charges provide 90% of the finance that Scottish Water uses to operate, maintain and improve services. This includes delivering a large programme of capital investment across Scotland for the benefit of current and future customers. The remainder is funded through lending from the Scottish Government, currently at £170m per year.

During the Strategic Review of Charges process, the level is set for the maximum amount of water charges for the regulatory period. Within that limit, Scottish Water can set annual charges. As part of the process, Ministers are required to issue their Principles of Charging (PoC), a statement of their policy on how charges should be implemented and distributed amongst customers.

The draft Principles of Charging Statement for 2027-33 is available in Annex B.

6.1 Overall Principles of Charging

The Scottish Government is proposing to carry forward the current Principles of Charging into the next regulatory period (2027-33) without significant changes. The draft Principles of Charging Statement states that charging should continue to reflect the following five core Principles:

• Be stable
• Cover the full costs of providing services to customers
• Be harmonised across Scotland – i.e. charges are not to vary for similar services to similar people
• Be cost-reflective – i.e. the charge for water services is limited to the cost of providing the services
• Be fair, equitable and affordable charges

The Principles of Charging Statement also sets out additional requirements that set policy positions for the manner of implementation.

For households, charges should be set based on Council Tax bands (as at April 2015) and collected with Council Tax by local authorities. For non-households, charges should continue to be based on meters where possible. To date, this approach to charging has served Scotland well, ensuring water charges deliver the right investment according to the above Principles.

However, the Government is consulting on the future of Council Tax, investigating reforms which would change the basis on which the current approach to household water charging relies.^[8] This provides an opportunity for a more fundamental review of charging policy to meet long-term and emerging needs.

The Government notes that the approach of charging households based on their Council Tax band has remained largely unchanged since before the creation of the three former water and sewerage authorities in 1996, later transferred to Scottish Water in 2002. This was considered progressive when water charges were separated from local taxes more than 30 years ago. However, this approach may not meet the emerging policy needs of the 21^st century, such as water scarcity.

Incremental changes have been made to charging policy over successive regulatory periods, in particular to provide more support for vulnerable households and to charge vacant properties. The resulting charging landscape is complex with various discounts resulting in untransparent charges and fewer than half of households paying the published rate. The scope for making further incremental improvements is limited, therefore we do not propose any changes in the near term whilst we consider long term changes.

Question 5a: To what extent do you agree or disagree that the charging approach set out in the draft Principles of Charging remains appropriate for the next 6 year regulatory period 2027-2033? [Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree]

Question 5b: Please explain your answer to question 5a. [free text]

6.2 Affordability Support for Customers

The Government recognises that a number of customers face difficulty in paying their water bills. A range of support measures for customers has been part of the charging framework for many years and currently amounts to around £254m a year. This is paid for by all customers, increasing their bills by an average of £98 per annum. The measures include:

• 25% Single Person Discount for 1 million households, costing £140m^[9]
• Up to 35% Water Charges Reduction Scheme for a further 200,000 low-income households, passported on and proportionate to their Council Tax Reduction, costing £30m^[10];
• 50% discount for 3,000 homes that remain vacant for the second half or a year and student nurses, long-term hospitalised, prisoners, etc; and
• 100% exemption for 155,000 disregarded households occupied by students or those with severe disabilities, costing £80m.

These measures provide support to over 52% of households in Scotland. In total, they cost £254m per annum, which is roughly the same amount as discounts provided by water companies in England despite its larger population. This means that the average Scottish household’s contribution towards affordability measures is eight times that of the average customer in England. We recognise that any above-inflation charge increases will impact vulnerable households and that there are limitations within the existing affordability measures:

• they do not perfectly target the households in water poverty – this is because the eligibility criteria of the Council Tax Reduction, and therefore also the Water Charge Reduction Scheme, uses a different definition of income, as they were designed for different purposes.
• those households receiving 100% Council Tax Reduction and therefore with no Council Tax liability, are still liable for 65% of the water charges which reflects the provision of a service rather than a tax.

In December Consumer Scotland published an update to its October 2024 report^[11] on the affordability of water charges, with new modelling of the impact of water charges over 2027-33^[12]. It finds that above-inflation increases over 2027-33 could increase water poverty from 10% to 15% and that current affordability measures are not well targeted. It recognises that there is limited scope to improve these measures in the short-term, and fundamental reform is needed in the longer-term. In the meantime, Consumer Scotland recommends that the Scottish Government:

• increases the Water Charges Reduction Scheme to 50%;
• establishes a new hardship fund to support households ineligible for the Water Charges Reduction Scheme.

The fundamental design of affordability measures is constrained by a charging policy based on Council Tax and its associated benefits. The Government has carefully considered whether these affordability measures could be improved, including Consumer Scotland’s recommendations, to support households in water poverty. It notes that at the start of the current regulatory period in April 2021, the Water Charges Reduction Scheme was increased from 25% to 35% to provide further support to low-income households. However, increasing the discount further to 50% could cost an additional £24m, which would be redistributed across all bills thus negatively affecting other households. This could have the unintended consequence of pushing households who do not receive discounts into water poverty. Furthermore, in its report, Consumer Scotland calculates that three quarters of households in water poverty are not eligible for any reduction.

We consider that maintaining the current discounts is the best way to minimise the charge increases for all customers. We recognise that more fundamental reform is needed in future to ensure a charging policy approach that is responsive to emerging needs. Therefore, in the meantime we are not proposing any further incremental changes to the affordability measures in the Principles of Charging for 2027-33.

Question 6a: To what extent do you agree or disagree that continuing to provide households with support for charges at the current level over the next regulatory period 2027-2033 will minimise the charge increases for all households? [Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree]

Question 6b: Please explain your answer to question 6a. [free text]

6.3 Support for charities

The water and sewerage exemption scheme for charities and community amateur sports clubs is set out in the Principles of Charging and provides reductions in charges where their verified annual income is less than £200,000 (100%) or £300,000 (50%)^[13]. There is no comparable support provided in the rest of the UK.

It aims to strike a balance between charities needing support, the costs this imposes on all other non-household customers and fair competition with small and medium sized enterprises (SMEs) where charities operate profit making activities (e.g. cafes). The number of recipients of this scheme has remained broadly similar over the current regulatory period since 2021.

We are not proposing to make any changes to the scheme, as the current eligibility criteria and level of exemption continue to support the intended population of charities and sports clubs without significantly distorting the market. This position relies on the following factors:

• income thresholds have remained steady, with the proportion of charities and clubs eligible for scheme has remained the same despite inflation;
• the cost of the scheme is low, with costs spread across all non-household customers, and remaining level at around 1.5% of bills;
• the exclusion of charities and clubs operating commercial activities is justified, as average SMEs’ income has only increased by around £50,000 since 2016^[14];
• the annual verification of eligibility remains necessary to maintain the integrity of the scheme and enable recipients who become ineligible due to a restricted funds to regularly reassess eligibility if their circumstances change;
• the administrative efficiencies from using verified annual accounts submitted to the Office of the Scottish Charity Regulator (OSCR) has reduced the administrative costs.

Question 7a: To what extent do you agree or disagree that the current eligibility criteria for the charity exemption scheme remain appropriate? [Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree]

Question 7b: Please explain your answer to question 7a. [free text]

6.4 Other changes to charges outwith the Principles of Charging

During the 2027-2033 regulatory period, we will continue to work with stakeholders on arrangements to implement specific aspects of the Principles of Charging. In particular, we will ensure the Household Billing and Collection arrangements (as set out in SSI 2023/52), under which Local Authorities collect household water charges for Scottish Water, continue beyond their March 2028 expiry. Other specific areas of charging that could be investigated within the policy set out in the Principles of Charging include simplifying the wholesale tariff structure and resulting default retail tariff.

Whilst using the Council Tax system as a mechanism for water charges and associated discounts has served consumers well, it no longer addresses emerging policy needs adequately. It does not provide the policy levers for tackling water scarcity or targeting affordability at the most vulnerable households. Charges based on Council Tax do not provide any incentive for water efficiency, or reflect the fact that the cost to serve any household is largely the same due to the infrastructure costs.

At present, water charges are linked to Council Tax and do not take account of the amount of water used or the nature of the property. Water charges will be affected by any changes to Council Tax policy which also constrains the ability to design policy levers appropriate for water charges. For example, Council Tax affordability measures, upon which water measures are dependent, do not adequately target households in water poverty.

6.5 Review of future charging policy

The 2027-2033 regulatory period will occur against the backdrop of significant ongoing changes:

• potential Council Tax reform following the current consultation, with any change impacting water charges^[15];
• increasing water deficits in the public water supply system and growing awareness of the need for water efficiency (see paragraphs on page 16 about water deficits);
• ongoing cost of living challenges and focus on tackling systemic poverty;
• industry wide reforms in England recommended by the Independent Water Commission; and
• changing attitudes amongst the Scottish public towards water use, sewage and flooding in the context of climate change, including paying for services^[16].

Household charging policy has remained fundamentally unchanged since before the establishment of Scottish Water in 2002 and its predecessor water and sewerage authorities in 1996. Back then, linking charges to Council Tax bands was considered progressive, as a proxy for low-income to support affordability. It also meant that water charges and affordability measures could be administered efficiently alongside Council Tax and its corresponding discounts. Over the past 20 years there have been minor incremental changes within this approach to household charging, for example increasing the level of some affordability mechanisms.

Water charges will be affected by any changes to Council Tax policy. Therefore, the Government will review water charging and associated affordability measures in light of changes to Council Tax policy over the course of the upcoming regulatory period 2027-33.

Question 8a: To what extent do you agree or disagree that a fundamental review of charging policy is needed, to ensure it meets emerging policy needs and to inform the approach for the next regulatory period starting in 2033? [Strongly agree / Agree / Neither agree nor disagree / Disagree / Strongly disagree]

Question 8b: Please explain your answer to question 8a. [free text]