Scotland s Water Industry: Past, Present and Future

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1 Scotland s Water Industry: Past, Present and Future A presentation by Katherine Russell Director of Strategy and Corporate Affairs Water Industry Commission for Scotland 16 June

2 Today s presentation will provide you with some background to what we have done and our journey so far Background What did we do? What has been achieved? What comes next? 2

3 The structure of the water industry in Scotland has undergone significant transformation over the past 40 years Regional Council In 1975 nine Scottish Regional Councils were set up to control public water supply and sewage disposal. Regional Council Regional Council Regional Council Regional Council Regional Council Regional Council Regional Council Regional Council In 1996, three new Scottish water authorities were created - East, West and North of Scotland Water. They took over water and waste water services from the former Scottish Regional Councils. West of Scotland Water North of Scotland Water East of Scotland Water In 2002, the Scottish Parliament passed the Water Industry (Scotland) Act 2002 which merged the three regional water authorities into Scottish Water the single public provider of water and sewerage services in Scotland and a public corporation. Scottish Water 3

4 Today the Scottish water industry is made up of a number of key stakeholders 4

5 Before the creation of Scottish Water in 2002, the three Scottish water authorities faced huge challenges The relative benefits (in environmental compliance and levels of service) of privatising the companies in England and Wales were becoming more evident There was a huge challenge to meet EU Directives It was clear that the water authorities were not financially viable in long term The water authorities had very different populations and geographical areas There was a substantial differences in charges between the authorities 5

6 Not surprisingly, therefore, it felt like a bit like a trip on a rickety old fishing boat 6

7 Established in 1999, the Water Industry Commission for Scotland has the statutory remit to promote the interest of customers of the Scottish water industry. Our role is to 1. Set prices at the lowest reasonable overall cost of delivering the objectives of the Scottish Government for the water and sewerage industry in Scotland 2. Monitor the performance of Scottish Water to ensure it is delivering value for money for customers within the regulatory contract 3. Facilitate the entry of new retailers such that the core business of Scottish Water is not adversely affected 7

8 Now it feels more like a trip on a luxury yacht but that does not mean that we can be at all complacent about the costs incurred 8

9 Today s presentation will provide you with some background to what we have done and our journey so far Background What did we do? What has been achieved? What comes next? 9

10 So how did we facilitate this transformation to a much more stable environment for customers? The Strategic Review of Charges has been key The Strategic Review of Charges takes place every 4 6 years and ensures that customers get value for money from water and wastewater services The process begins when the Scottish Government sets objectives for Scottish Water to achieve over the next review period Scottish Water then considers how much funding it will need to achieve these objectives and sets out its requirements in a business plan We carefully scrutinise Scottish Water s proposals to determine whether they meet the objectives and represent value for money for customers Based on our analysis we set price caps that deliver the Government s objectives for the water industry at the lowest reasonable overall cost 10

11 Key to the success has been the collection of regulatory information which enabled performance benchmarking and the establishment of an effective monitoring regime. This involved Collection of clearly defined information on financial performance, expenditure, assets and other operational data Publication of all the information Benchmarking of Scottish Water s costs against the privatised companies in England and Wales using unit cost and econometric approaches Building of consensus with all stakeholders about the gap in performance and why it existed: holding up the mirror Reviewing of all capital expenditure and assessing the scope for improvement 11

12 We also monitor and incentivise Scottish Water s levels of service performance through a range of scoring systems and metrics We assess the level of service that Scottish Water provides to its customers through a scoring system called the overall performance assessment (OPA) The OPA is calculated by weighting 17 individual performance measures which reflect areas that are most important to customers We set OPA targets as part of the Strategic Review of Charges and monitor performance against the targets throughout the regulatory period 12

13 The delivery of required outputs is monitored by a group called the Outputs Monitoring Group (OMG) The OMG consists of the Scottish Government, Scottish Water, Drinking Water Quality Regulator, Scottish Environmental Protection Agency, Citizens Advice Scotland and WICS The OMG monitors delivery of the outputs which have been defined as part of the Strategic Review of Charges, for example: the number of water treatment works upgraded The OMG assess Scottish Water s progress with the delivery of outputs on a quarterly and annual basis 13

14 Today s presentation will provide you with some background to what we have done and our journey so far Background What did we do? What has been achieved? What comes next? 14

15 Since Scottish Water has successfully reduced operating expenditure over 30%... Scottish Water is now comfortably in the pack in terms of efficiency among the private companies in England and Wales m Operating expenditure ( prices) 15

16 Scottish Water has undertaken significant levels of capital investment to enhance levels of service and meet new environmental standards The impact of this substantial investment on customer bills has been offset by significant improvements in efficiency Total capital expenditure ( prices) m Cost of delivering outputs without improvements in efficiency Actual capital expenditure Regulatory period 16

17 Efficiency is not just about cutting costs there have also been significant improvements in levels of service Regulatory Period Total leakage (Ml/d) Regulatory Period Regulatory Period ,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 % of complaints not responded to within 10 days Regulatory Period Regulatory Period Zero Regulatory Period ,6 0,5 % of properties receiving inadequate pressure Number of properties experiencing unplanned interruptions not resolved within 6 hours 0, ,3 0,2 0, Regulatory Period Regulatory Period Regulatory Period Regulatory Period Regulatory Period Regulatory Period

18 Due to this improvement in efficiency, average household bills are today around 110 a year lower than they would otherwise have been Today customers of Scottish Water have among the lowest average household bills in Great Britain Average household water and sewerage bill Water and wastewater companies in Great Britain 18

19 Today s presentation will provide you with some background to what we have done and our journey so far Background What did we do? What has been achieved? What comes next? 19

20 Over the years the relationship between us as the economic regulator and Scottish Water has matured as Scottish Water has become more pro-active in recognising the scope for improvement You will take 40% out of your costs Company leading the way with the support of customers? Regulator Company onwards

21 In light of this, for the Strategic Review of Charges we sought to enhance the role of customers in the price setting process. In November 2011 the Customer Forum was established The Customer Forum is an independent entity which is responsible for identifying and understanding customers priorities and seeking to get the best outcome for customers The Customer Forum is able to make decisions on areas of price setting as opposed to influencing our decisions by engaging directly with Scottish Water Through this direct engagement with Scottish Water, the Customer Forum set out to agree the price settlement and decide on discretionary improvements to levels of service within a lowest overall cost framework set out by the Commission This dynamic, two-way process between customers and Scottish Water is substantially different from the arrangements that were in place before 21

22 In 2008 Scotland became the first country in the world to open up water and sewerage services to competition for all public sector, non-profit and business organisations All non-household customers can choose who supplies their water and waste water services regardless of the customer s size or location Scottish Water continues to operate the network of pipes, resources and treatment assets. Scottish Water s non-household retail activities are carried out by a separate company, Business Stream New entrants compete with Business Stream, purchasing wholesale services from Scottish Water at regulated prices and providing retail services to customers Competition has facilitated new and improved services, further reduced costs and increased emphasis on efficient water use 22

23 In 2012 the Scottish Government created the Hydro Nation initiative, which focuses on promoting Scotland s expertise and resources in the water sector through achieving three main aspects: 1. Utilising Scottish expertise to maximise the economic benefit of our abundant water resources within a sound ecological context 2. Raising our international profile through recognition of Scotland as an international leader on water management and governance 3. Developing a water centre of expertise with international reach Through achieving these three aspects the Scottish Government is aiming to establish Scotland s status as a Hydro Nation a world leader in water expertise and knowledge 23

24 Water Industry Commission for Scotland First Floor, Moray House, Forthside Way, Stirling FK8 1QZ E: T: +44(0)

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