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

objectives, were set out in 2005 in a statement originally made All these matters have continued to be problematic. In
to Parliament: prices should be ‘stable, fair and affordable’, SW’s second draft business plan, the realisation of both the
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98
with harmonisation within customer groups, but the gradual desirable and essential objectives were costed as requiring an
unwinding of cross subsidy between groups; some £44 million 88 per cent increase in household bills; the Executive wanted
of subsidy from business to householders had been identified. 99 no increase in real terms, and the subsidies unwound. For the
Additional service issues included odour from sewage treatment essential objectives only, SW estimated its capital programme
100
101
plant, water pressure, and sewer flooding. In terms of at £3.2 billion, some £200 million a year more than could be
affordability, and because water charges are collected (still) along efficiently invested given Scotland’s civil engineering capacity.
107
with local council tax, discounts would remain for single adult The Commissioner’s draft determination took a very different
households as well as new discounts for all households in receipt view; the essential and desirable objectives could be met with
of council tax benefits, but discounts for second homes would a 2 per cent increase for the first two years, falling again by
be abolished. Subsidy for voluntary organisations would remain, 2008/09. There could be 60,000 new connections, on a capital
at least until 2010. 102 programme of £2.1 billion, with continued operating
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Meantime the Executive committed itself to 120,000 new efficiency savings of £145 million per year; the differences
homes and 4000 ha of new commercial development for which were too great to account for by bargaining positions alone.
infrastructure would need to be provided. This would be The final determination, by the new Commission, provided
109
achieved in part by an additional £200 million of government for a fall in both household and business charges, in real terms.
lending, subject to the regulator’s agreement that the subsequent SW accepted the determination, and produced a business plan
programme was still manageable. It was further assisted by with a backloaded investment programme; all of the regulators
new regulations clarifying provisions in the Water (Scotland) rejected the plan, and SW’s chairman resigned. 110
103
Act 1980 and the Sewerage (Scotland) Act 1968, whereby there As we move into the strategic review of prices for 2010–
was an entitlement to new connections if these could be made 2014, the investment objectives remain as set out in 2005, and
at ‘reasonable cost’; and also by policy guidance as to which the government’s pricing consultation has maintained and
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104
parts of infrastructure are the responsibility of SW, which the refined the principles from 2002–06: cost recovery, cost
responsibility of the developer, and which are to be shared. 105 reflexivity, geographical harmonisation within user groups, and
the unwinding of cross-subsidy across groups, within a stable
and affordable regime. The exemption for small, including
voluntary, organisations will remain at least until 2014, as will
98 Scottish Ministers 2005 Water Industry (Scotland) Act 2002 Statement of other protections for vulnerable domestic customers, but these
Policy Regarding Charges available at http://www.scotland.gov.uk/Topics/ will be reviewed as and when the government proceeds with
Business-Industry/waterindustryscot/future last accessed 10 June 2008. plans to move to a local income tax. There is recognition that
The parliamentary statement was made on 9 February 2005, the same
day that the 2005 Act passed its stage 3 hearing in the Chamber. the capital programme is over-extended (at some £600 million
99 Stone & Webster Consultants Ltd, 2005 Paying for Water Services 2006 per year including the overhang from 2002–2006) with a
-2010 – Analysis of Whether there are significant Cross-Subsidies Between the commitment to reduce it to a manageable level. Similarly, whilst
Different Customer Groups Served by Scottish Water: Final Report Scottish operating efficiencies continue to be made, these will also reduce
Executive Publication available at http://www.scotland.gov.uk/ in future. Borrowing will stay at around the same levels, with
Publications/2005/02/20658/51989 last accessed 10 June 2008.
100 And this has been addressed by the production of a statutory code the government continuing to forgo a dividend. If SW can
under the 2005 Act; the Sewerage Nuisance (Code of Practice) (Scotland) outperform its targets, it will be permitted to maintain the
Order SSI 2006/155. surplus in the form of a ‘gilts buffer’.
101 Flooding continues to exercise the minds of policymakers and
legislators in Scotland as elsewhere, with a recent Parliamentary Inquiry
(available at http://www.scottish.parliament.uk/s3/committees/rae/
inquiries/flooding/index.htm last accessed 10 June 2008) and a
prospective Bill. Pluvial flooding, including sewer flooding, was described is in fact an existing householder, usually being required to make a
in the Inquiry Report as the ‘poor relation’. The Glasgow area has been connection to the sewerage system because of water quality concerns
particularly badly affected, and part of the response has been the from the environmental regulator.
development of a Metropolitan Glasgow Strategic Drainage Plan, an 106 SW 2005 Second Draft Business Plan available at http://
approach likely to be followed in other areas after the Flooding Bill is www.watercommissioner.co.uk/default.aspx?VirtualHandlerName=
progressed. Business_Plans last accessed 10 June 2008.
102 Water and Sewerage Charges (Exemption and Reduction) (Scotland) 107 WIC 2005 Strategic Review of Charges 2006–2010 Draft Determination
Regulations 2006 SSI 2006/72. The exemption for charities will now be available at http://www.watercommissioner.co.uk/view_Determinations.aspx
extended until 2014; see Note 108 below, the draft statement. The change last accessed 10 June 2008.
to Local Income Tax, Note 53 above, will require wholesale reform to 108 With 20 per cent of the difference accounted for by efficiency
the current procedures for collection of revenue from householders, as savings, and the rest by over-estimates identified by the Reporter; ibid.
well as the exemption schemes. 109 WIC 2005 Strategic Review of Charges 2006–2010 Final Determination
103 The Provision of Water and Sewerage Services (Reasonable Cost) available at http://www.watercommissioner.co.uk/view_Determinations.aspx
(Scotland) Regulations 2006 SSI 2006/120. last accessed 10 June 2008.
104 In the past, SW and its predecessors had adopted a ‘rule of thumb’ 110 Allan Alexander resigned on 20 February 2006, see http://
of some £1200 contribution for sewerage connections, and some £500 www.scotland.gov.uk/News/Releases/2006/02/20172622 last accessed
for water. Now, the regulations specify a formula for calculating the 10 June 2008. Ronnie Mercer was appointed on an interim basis and his
reasonable cost contribution. appointment subsequently confirmed on a four year appointment from
105 Scottish Executive 2005 Connecting to the System: Consultation on Paying September 2007; his experience at Scottish Power will be very helpful
for Connections to the Water and Sewerage System Paper 2005/19 available at given the sort of reforms currently underway. The management of SW
http://www.scotland.gov.uk/Publications/2005/08/23140228/02289 will be considered further below.
last accessed 10 June 2008; Scottish Executive 2006 PAN 79 Water and 111 Scottish Government 2007 Paying for Water Services 2010–2014, Note
Drainage available at http://www.scotland.gov.uk/Publications/2006/09/ 38 above; a Draft Statement has been published (Scottish Government
26152857/0 last accessed 10 June 2008. Whilst developers may be 2008, see http://www.scotland.gov.uk/Publications/2008/05/poc2010-
expected to bear their share of the costs in many cases, this is more 14draftstatement last accessed 10 June 2008; and the final binding
problematic where low cost housing is necessary, or where the ‘developer’ statement under WISA will be published in September.

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