Water services - investing in and paying from 2027: consultation

8. Annex B – Principles of Charging

Draft Principles of Charging for regulatory period 2027-33

Water services – charging principles: 2027 to 2033

Scottish Ministers make the following statement of policy regarding charges, for the period from 1 April 2027 to 31 March 2033 (the “regulatory period”), under section 29D of the Water Industry (Scotland) Act 2002 (the “2002 Act”). This statement of policy includes high level principles and supporting mechanisms, and is intended to allow Scottish Water to achieve the Objectives set by Ministers (Ministerial Objectives) for the period, to play its significant part in delivering the long-term Water Sector Vision.

This statement of policy has been prepared in consultation with the industry regulators: Drinking Water Quality Regulator (DWQR), the Scottish Environment Protection Agency (SEPA) and the Water Industry Commission for Scotland (the Commission), and the statutory consultees: Scottish Water, the Consumer Scotland (CS) and licenced water and sewerage services providers.

Ministers welcome the industry wide commitment to embrace Ethical Business Practices. Ministers are committed to achieving the right balance of quality of services and value for money.

This statement of policy supports the delivery of the Government's Policy Prospectus of focussing government and public services on:

• eradicating child poverty,
• growing the economy,
• tackling the climate emergency,
• ensuring high quality and sustainable public services.

Under section 29C of the 2002 Act, the Commission and Scottish Water must (so far as consistent with other specified duties) give effect to this statement of policy when exercising certain charging functions under the Act. In particular, it will guide the Commission when determining, under section 29B of the 2002 Act, the maximum charges with which Scottish Water must comply during the regulatory period.

Principles

Scottish Water and the Commission should apply the following principles of charging when setting and approving annual charges. In applying the principles, Ministers expect the Commission and Scottish Water to take account of the prevailing economic circumstances facing customers whilst also ensuring the industry can continue to make progress to address the long-term challenges it faces.

Principle 1 – Stable charges

1. Ministers recognise the importance that customers attach to stability and certainty in charging. Ministers require that the Commission, when determining the maximum amounts of charges, have regard to the level of inflation, as measured by the Consumer Prices Index (CPI).

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 Scottish Water nationally of providing that service to that group as a whole.

Principle 5 – Fair, equitable and affordable charges

5. In determining the maximum amounts of charges, the Commission should ensure Scottish Water is sustainably funded to fulfil its statutory role and play its significant part in delivering the Water Sector Vision over successive regulatory periods.

6. The Commission and Scottish Water must also take into account that charges should be affordable and set at a level that is fair and equitable to present and future generations.

7. Scottish Ministers expect Scottish Water to set its charges taking into account the affordability measures contained within this statement.

Additional Requirements

Household charges

8. Ministers confirm that the collection arrangements and tariff structure applying to unmetered household charges in 2021-27 should continue for the 2027-33 period. That is:

1. 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.
2. The bandings for household water and sewerage charges should replicate the council tax bandings that were in place in April 2015 and apply the discounts and reductions that apply to council tax, subject to the provision set out at paragraph 7.
3. No discounts or reductions in water, sewage or drainage charges should be applied for second homes.

Affordability support

9. Ministers confirm the Water Charges Reduction Scheme (WCRS) should remain the means by which the water industry supports those customers least able to pay water and sewerage charges. Detailed provisions are set out at Annex 1.

Household drainage charges

10. Metered and unmetered household charges should continue to include appropriate elements to recover the cost to Scottish Water of dealing with rainwater that drains to its sewers from:

• roofs and other impermeable surfaces from household premises; and
• public roads.

Wholesale charges

11. Ministers confirm that non-household customers should be charged for water and sewerage services based on meters, where possible.

12. Ministers request that by 2029 Scottish Water reviews the wholesale tariff to encourage water efficiency, for implementation over the remainder of SRC27. And that accordingly WICS reviews the directions for the Default Retail Tariff.

Wholesale drainage charges

13. Ministers confirm that, in relation to wholesale charges, Scottish Water should continue to include appropriate elements to recover the cost to Scottish Water of dealing with rainwater that drains to its sewers from roofs and other impermeable surfaces from business premises and from public roads.

14. Wholesale charges related to rainwater drainage from roofs and other impermeable surfaces from business premises should generally be calculated by reference to Rateable Value, as shown in the current valuation roll.

Financing

15. Ministers confirm that, in relation to the financing of Scottish Water, the following considerations should apply:

1. Financial Strength – Scottish Water should be sustainably and prudently financed, consistent with the governance framework within which it operates.
2. Dividend – The Government will not take a dividend from its ownership of Scottish Water. However the Scottish Ministers may direct Scottish Water to fund activity that Ministers consider necessary for the successful implementation of the water sector vision and/or delivery of the Ministerial Objectives.
3. Lending – The Government will continue to make finance available through lending to Scottish Water in the 2027-33 period in support of its investment programme. The Government wishes to ensure that this lending is at the lowest practicable level, consistent with the principle of stable charges.
4. Financial Performance – Financial performance in relation to on-going operating and broadly recurring costs should be considered in line with the financial ranges set out by the Commission. This will 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 Scottish Water. This arrangement protects the position of customers and ensures that they do not compensate Scottish Water for inefficiency or poor management. Any financial outperformance will be deployed in line with Ministers’ approval. Scottish Water should provide stakeholders with separate reporting relating to expected and delivered capital expenditure.

Paying for additional capacity

16. Ministers confirm the costs associated with meeting the needs of new housing developments and the domestic requirements of new and expanding commercial and industrial developments should be funded as follows:

• Extending Local Infrastructure – the costs of providing and installing new local infrastructure associated with developments up to the connection with existing Scottish Water Network assets will be funded by Scottish Water through reasonable cost arrangements up to a maximum limit under the Provision of Water and Sewerage Services (Reasonable Cost) (Scotland) Regulations 2015. The limit applies cumulatively to the costs of extending local infrastructure and the costs of enhancing existing assets associated with the development. Individual developers will be required to meet additional costs above this limit.
• Enhancing Existing Network Assets – the costs associated with increasing the capacity of existing network assets where they are not readily attributable to a particular developer will be financed by all developers through infrastructure charges and the enhancements will be delivered by Scottish Water. Where the costs of increasing the capacity of existing network assets associated with development up to the connection with existing Scottish Water Network assets are readily attributable to a particular developer, they will be funded by Scottish Water through reasonable cost arrangements, up to a maximum limit under the Provision of Water and Sewerage Services (Reasonable Cost) (Scotland) Regulations 2015. The limit applies cumulatively to the costs of extending local infrastructure and the costs of enhancing existing assets associated with the development. Individual developers will be required to meet additional costs above this limit.
• To support these arrangements, the Commission should provide for Scottish Water to levy infrastructure charges which will increase in line with the cap for:
  • Household Development – for each dwelling to be connected to Scottish Water's water services and for each dwelling to be connected to Scottish Water's sewerage services;
  • Non-Household Development – for the domestic requirement of each premises to be connected to Scottish Water's water services and for each premises to be connected to Scottish Water's sewerage services.
• Upgrading Strategic Infrastructure^[17] - Scottish Water will be required to meet the costs of upgrading strategic infrastructure.

Assistance for charitable organisations

17. Ministers recognise the contribution that charities make to Scotland’s well-being and prosperity and confirm that the scheme implemented for the 2021-27 period will continue in the 2027-33 regulatory period. 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 2. This scheme is to be funded by the generality of non-household customers.

Paying for regulation and customer representation

18. Ministers confirm that the cost of Scottish Water’s economic regulation, water quality regulation and customer representation (WICS, DWQR and CS respectively) should continue to be covered by annual levies on Scottish Water funded out of charge income.

19. Ministers note that the costs of SEPA in regulating Scottish Water are funded from charges levied by SEPA in accordance with its charging regime.

Preparing for Future Regulatory Periods

20. Ministers request work be undertaken to prepare for the period beyond 31 March 2033. This should take account of the impacts of changing economic and social circumstances, and the future investment that will be required to address the long-term challenges facing the water industry.

21. The charging policies contained within this document will be reviewed by the Scottish Government, in consultation with water industry stakeholders, to ensure that they continue to meet the Government’s overall policy priorities and to inform water industry policy for the period beyond 31 March 2033.

22. This work should inform the next Strategic Review of Charges, which will be commissioned by Ministers within the 2027-33 period.