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ARTICLE 16[2006/2007]4 ULR MARKET LIBERALISATION & REGULATION IN SCOTTISH WATER SERVICES – HENDRY 159

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also a feature of Albion, where there is no realistic margin for In the second Quality and Standards consultation, the
a new entrant, but it is also possible to analyse this failure more Executive was still focused on the need to invest to meet EC
broadly in terms of the regional monopoly, and vertical standards, including drinking water quality and pollution from
integration, of the industry. It is notable that the Authority is waste water, as well as reliability of service and the levels of
now recommending approaches along the Scottish model, with awareness of domestic customers. However, by the time the
separation of retail activities for business customers as a first Commissioner produced the strategic review of charges in
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stage. The English consultation goes beyond what is happening October, the parliamentary inquiry had reported and the rules
in Scotland, extending retail choice in the future to domestic of the game had changed. Now, as noted, the emphasis was
customers and also suggesting unbundling of the industry, with on the benefit from an amalgamated authority, and the
separation of upstream bulk abstraction. This is more reflective significant benefits in harmonising tariffs. However, there were
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of the structure of the industry in many other countries and, other features of the strategic review that indicated new areas
even allowing for the natural monopoly characteristics of water, of focus in the years to come, especially the relative inefficiency
is more in line with the theory and practice of competition of the industry, the lack of adequate and reliable data, and the
policy in other services. The Authority recognises the steps need for better customer services and better reporting
being taken in Scotland as a positive example of how to mechanisms.
proceed. By 2004, these matters were prominent. The Parliamentary
The current liberalisation is a reform with significant Finance Committee had held an inquiry into Scottish Water,
potential. The question is not only whether there will be an which led to a highly critical report. This questioned the need
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improvement for businesses in Scotland, but whether it merits for such high increases in prices over a short period,
the praise and attention it has received, in the context of the disagreements over efficiency targets, concerns over the large
other, wider, difficulties facing the industry. capital programme and general concerns over financial
accountability and stakeholder transparency. The report was
released just a few weeks after the Commissioner and SW had
Troubled Waters failed to agree on the charges for 2004/5, forcing Ministers
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to step in. The Committee did not, in the end, accept the view
The period between SW beginning operations and the of two independent experts that there had been an error in
introduction of the new market saw much regulatory and policy applying treasury accounting rules, but generally the report
activity, not all of which was or is directly related to that market found significant problems and difficulties in the new regime.
and some of which may be seen as of greater long-term The Committee welcomed a commitment by the Executive to
importance to the development of the sector. Much of this consult in future not just on investment priorities, but
related to the perceived negative legacies of the preceding years, specifically on the principles of charging.
including the capital investment programme and development This commitment was put into effect in late 2004, when
constraints, operating inefficiencies, and the system of charges the Executive released both the Q&S3 consultation on
– both the need for harmonisation of household charges investment from 2006 to 2014, and a separately, a consultation
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discussed above, and the future of charges in the non- on charges from 2006 to 2010, linking directly to the next
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household sector, including the voluntary sector. These price determination. Whilst the investment backlog, and its
problems are interrelated. Meantime, periodically bubbling to quality drivers, were still a focus, new problems were emerging
the surface, there has been the political and philosophical debate – the capital programme overhang, development constraints
as to the very structure of the industry itself. from both water and sewerage infrastructure, and the extent
The backlog of investment in the capital programme was of cross-subsidy between user groups. These became, and
recognised by the Commissioner at his first interim review of remain, dominant issues. The capital programme was running
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charges, and he proposed significant increases in prices over at some £500 million per year, half of the total civil engineering
the two-year period, with the biggest increases in the North. capacity in Scotland. Out of a total of £1.8 billion, some £240
He also announced his intention of bringing in a formal system million has been provided for development constraints, both
for asset management planning, and requiring the authorities new developments and existing housing (mainly for first time
to report to him in a manner analogous to the OFWAT June sewerage). Meantime the cost of releasing all new development
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return. The reliability of data from SW has been an ongoing constraints was estimated at another £1 billionn; a strategic
problem that has only recently seen significant improvement; issue was how this burden should be shared between SW and
one example, particularly relevant to this article, is the significant developers.
reduction in numbers of non-household customers prior to In the consultation on charging, the Executive began to
the 2006–2010 price review. 91 lay down the key principles within which price determinations
would be made, and these, with the longer-term investment

88 See, for example, in South Africa, the Water Boards for bulk supply 92 Q&S2, Note 34 above.
to service providers under the National Water 1998 Act, Act No.36; in 93 WIC 2001, Strategic Review of Charges 2002-2006 available at http://
Queensland Australia, various entities, both public and private, do the www.watercommissioner.co.uk/view_Price_Setting_2002-06_Pubs.aspx
same under the Water Act 2000, Note 54 above. last accessed 10/6/08.
89 WIC 2001,Note 29 above. 94 Scottish Parliament Finance Committee Report, Note 56 above.
90 Ibid., and see OFWAT http://www.ofwat.gov.uk/aptrix/ofwat/ 95 Scottish Executive Press Release, 3/2/04, Ministers Announce New Water
publish.nsf/Content/junereturn last accessed 10 June 2008. Charges available at http://www.scotland.gov.uk/News/Releases/2004/
91 WICS 2007 Stakeholder Workshop 2 Discussion Paper available at http:// 02/4995 last accessed 1 June 2008.
www.watercommissioner.co.uk/view_Stakeholder_workshops.aspx last 96 Quality and Standards 3, Note 35 above.
accessed 10/6/08. 97 Paying for Water Services 2006-2010, Note 37 above.

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