WICS warns Scottish Water’s low 2022/23 price rise could leave it short of investment

The Water Industry Commission for Scotland (WICS) has cautioned that Scottish Water’s 2022/23 charging decision will leave the company £100m short of the investment allowed in its SRC21-27 final determination (FD).

Last week, Scottish Water announced price rises of 4.2% for 2022/23, applying to both households and the licensed providers who sell water to businesses. The new charges, which for households are collected alongside local authority council tax, will mean Council Tax Band A customers pay £318.96 for water and wastewater services, rising to £956.88 for Band H. Scottish Water said the average bill will increase 31p a week, and that around half of all households in Scotland receive financial support as they automatically have either a discount, exemption or reduction applied to their charges.

Chief executive, Douglas Millican, commented: “We understand there needs to be a balance between the need for higher levels of investment and the financial challenges faced by households at the present time. We have set charges at a level that takes account of those challenges while being open and clear that charges will need to increase further in future years.”

WICS said its approval of the scheme was conditional on the company providing a full explanation on how it will manage costs and revenues to deliver the required investment during the remainder of the 2021-27 regulatory control period.

In a letter to Scottish Water, WICS chief executive, Alan Sutherland, explained: “Our final determination set out a 2% average annual real increase in charges from 2021/22 to 2026/27. The 1.8% increase in charges for 2021-22 and the proposed 4.2% increase in charges for 2022-23 implies that Scottish Water is raising less revenue relative to the level allowed for in the final determination. As a result, charges would now need to increase by more than CPI+2% in each of the next four years if future customers are not to be disadvantaged.”

The letter went on to say inflation is unlikely to fall below the October 2021 figure of 4.2% within the year, and therefore that 2023/4 charges would need to be much higher in nominal terms. It continued: “Given that any elevated nominal increases in charges will always be challenging, it is not clear to us how Scottish Water now plans to be able to deliver in full the Scottish Ministers’ Objectives. Even if the increases required to bring revenues in line with the final determination were possible, delivery of the Objectives will inevitably be impacted by the shortfall in capital resulting from the increases adopted in the first two years of this regulatory control period.”

On top of that, WICS pointed to other elements that may further impact Scottish Water’s capacity to deliver against its commitments: newly announced investment in the range of £300m-£400m to improve storm overflows, at least half of which will fall before 2027 and is not provided for in the final determination; cost increases relating to Covid; capital inflation increases above CPI resulting from supply chain constraints; and uncertainty around demand and revenue from the non household sector.

Sutherland concluded: “Whilst Scottish Water has coped well with some of the challenges due to extreme weather conditions in the current year, delaying investment on climate change adaptation and mitigation will, ultimately, impact Scottish Water’s performance and increase future costs.”