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Welcome back. Agenda item 4 is an evidence session with Scotland’s water industry regulators: Consumer Scotland and the Water Industry Commission for Scotland. Today’s session follows on from our meeting last week, when we heard from Scottish Water on its latest annual report and accounts and the main challenges for the water industry in Scotland. We will continue to explore those issues with today’s panel.
I am pleased to welcome from Consumer Scotland Emma Ash, water policy manager; Tracey Reilly, head of policy and markets; and Fraser Stewart, research manager; and Alan Sutherland, chief executive of the Water Industry Commission for Scotland.
Thank you for joining us. I am sorry that we are a little behind time-wise. Before we move on to our many questions, I invite Emma Ash and Alan Sutherland to make brief opening statements.
10:15
Thank you for inviting us to this evidence session on Scottish Water and for giving me the opportunity to make an opening statement.
Consumer Scotland is a non-ministerial office that was set up by the Scottish Parliament under the Consumer Scotland Act 2020. As the statutory body for consumers in Scotland, our core purpose is to improve the lives of current and future consumers. Our strategic objectives, which are relevant to the water industry as well as to other markets that we work in, include enhancing understanding and awareness of consumer issues through our research and analysis, and using our findings to inspire and influence the public, private and third sectors to put consumer interests at the heart of what they do. We also want to enable the active participation of consumers in a fairer economy by improving access to information and support.
Throughout our work, we take a partnership approach, collaborating closely with other organisations with interests and expertise in consumer issues.
Our core funding comes from the Scottish Government’s annual budget, but we also receive levy funding for our work relating to water. Our levy funding is £358,000 for this year.
In our current work programme on the water sector, we are focusing on four key themes: climate change adaptation; equitable investment; fair markets; and affordable services.
As part of our statutory role, we work with the Scottish Government, sector regulators and Scottish Water to ensure that consumers’ needs and interests are represented in the design and delivery of Scottish Water’s capital investment strategy.
Our work includes producing research that promotes positive outcomes for consumers in key areas such as water and waste water services to ensure that they remain affordable, are resilient to climate change and meet the needs of current and future consumers. We are also developing evidence to promote a non-domestic market that is fair and which operates in a way that protects the interests of its customers as well as the wider good of the market.
Recent Consumer Scotland research that has been shared with the committee includes a report on the importance of blue-green infrastructure in helping to reduce flooding caused by climate change and a survey on consumer attitudes towards the transition to net zero.
Thank you again for inviting us to give evidence. We look forward to answering your questions.
Thanks very much, Emma.
Good morning, everyone. Thanks for inviting me. It is always good to hear your questions.
As you know, the Water Industry Commission for Scotland is the economic regulator for the water industry in Scotland. Our statutory duty is to promote the interests of customers—both today’s customers and, importantly, future customers. At the end of 2020, we published our strategic review. I will give a bit of context to—I hope—help you to understand what we are doing. That review is the mechanism by which we established the lowest reasonable overall cost for Scottish Water to deliver on the objectives of the Scottish ministers within their principles of charging.
As we were going through the review, it became clear that Scottish Water would need to increase its maintenance and replacement expenditure by a factor of about three if it is to prevent the asset deterioration that we are seeing from continuing. Why is that important? Asset deterioration might not always be seen—in fact, it is rarely seen until it is too late—but it puts significant upward pressure on operating costs and carbon emissions and it makes it much more difficult to adapt to climate change.
At the end of a process of substantial engagement with stakeholders, and with input from the Organisation for Economic Co-operation and Development, we concluded that that investment could and should be phased but that we need to get to a more sustainable level by about 2040, which coincides with Scottish Water’s net zero target.
In the review, we also saw improved operating and capital expenditure efficiency. Even with that, however, there will still have to be substantial increases in charges, and we concluded that they should be phased. That was before we knew that inflation was going to be the issue that it is. Obviously, no one wants a higher bill, but we want to be able to rely on a sustainable waste water and drainage service. Steps were taken at the beginning of this regulatory period to protect vulnerable customers through the council tax reduction scheme, but more will be required, quite frankly.
Last week, the committee heard evidence from Scottish Water that, because the board had opted for lower charge limits than we set in the determination, it would have £500 million less to invest in that period. What it did not tell go on to tell you was that, if charges were to increase in line with inflation over that period—at the moment, they are increasing by about 4.5 per cent less than inflation—in future regulatory periods, from 2027 onwards, Scottish Water would have £200 million less every year to invest in the maintenance and replacement of infrastructure. That impacts levels of service and the ability to adapt to climate change.
Why is all that important? To me, it is obvious that we need to be in a position to have a proper response to climate change. Let us consider what is happening in England and Wales. Since Scottish Water was formed in 2002, investment levels in England and Wales have been 40 per lower than in Scotland. Companies in England are proposing huge increases in investment now, which would be followed by huge price increases.
In the next five years alone, companies in England will be asking, on average, for a 30 per cent real-terms increase in their tariffs. Of the companies that have produced sensible answers—I am taking out the higher outliers—the average figure represents a doubling of charges in real terms by 2040. That compares with the figure of 40 per cent in our strategic review. Those companies are not addressing the replacement and refurbishment of assets in the way that we are trying to do in Scotland.
Over the past 23 years, our focus has been to get much more clarity on what is being invested and why and how. That is much more challenging than it used to be because we have moved away from discrete improvements to meet European standards to focus increasingly on investments in replacing and refurbishing assets, which tend to be much smaller, more discrete projects that are harder to see.
Even more challenging than that are the green-blue solutions. On those, there are two issues. First, can we get the incentives right for people to pursue those green-blue solutions in the right way? That is not always easy. Secondly, we need to monitor that sufficient progress is happening on that, which is quite a challenge.
That is what we are looking for with regard to prioritisation. There has been some progress in the past year, but that has not been as fast as I would like, to be quite frank. We are now beginning the preparations for the next strategic review, which starts in 2027. At that time, we will be looking for Scottish Water to evidence in a way that is genuinely compelling to its customers and Scotland more broadly what it needs to invest and why. We are expecting to publish a methodology for that review by February next year. That is by way of context, convener.
Thank you, Alan. We have lots of questions, and Jackie Dunbar will start us off today.
Good morning. Thank you for coming along. What is your broad assessment of Scottish Water’s performance over the past year? I will start with Emma Ash, please.
In our statutory role, we work regularly with stakeholders, including Scottish Water. We attend various statutory meetings with the organisation and engage with it regularly to represent the consumer interest. As a new organisation, we have found that process to be fairly collaborative. Scottish Water is keen to see the research that we develop and to let that help to inform some of their decision making, which is very welcome.
Could you maybe go into some depth about whether you think that Scottish Water has performed well during the past year?
Scottish Water monitors its own level of customer experience and customer service, and there has been an improvement in that, which is good.
This year, through research, we have had opportunities to speak with consumers. When we have done so, we have found that they are generally quite happy with Scottish Water’s brand and its product—the water that they receive. There are opportunities for it to give more information on particular issues, such as climate adaptation, what the opportunities are and what the scale of the problem is.
Alan Sutherland, can I have your views, please?
I think that its performance during the past year was broadly similar to that of the previous year. Its capital programme is running between six and 12 months behind, based on the latest estimates and forecasts. Customer service levels, as measured by our overall performance assessment, are broadly flat year on year.
It would be nice to see more demonstrable improvement in efficiency than we have seen. Scottish Water has a target to improve its underlying operating cost efficiency and its capital expenditure efficiency, and the jury is out as to whether it is achieving that. It is unfair to base its performance on one year—we have to look at that over a period—but the jury is out as to whether it will achieve that during this regulatory period.
I will take that further. Have you seen any evidence that Scottish Water is getting back on track? You said that there is still a six-month slippage, but are you confident that you are seeing movement towards getting back on track? I know that Scottish Water is not where it needs to be yet.
There has been an improvement during the past year, particularly during the previous six or eight months, in its level of engagement, on what it is delivering and on how it is delivering it, but there is still some way to go.
Could you maybe expand a little bit on what the impact is to the project delays—sorry, let me put my teeth back in. What is the impact of the project delays on the quality of service that Scottish Water provides?
Scottish Water runs a massive asset base. At price levels of five years ago—and let us say that we have had capital inflation of 25 to 30 per cent during that five-year period—its asset base would have been valued at about £70 billion, so about £100 million to £200-million worth of slippage in investment will not necessarily be seen. However, the slippage is happening, and it is making things a little bit more challenging and a little bit more difficult than they otherwise would be.
Could—should—that be managed? When we see the quality of the operational responses that Scottish Water generates to issues, we know that it is very good at managing things, so we probably do not experience any issues because of that, but that does not mean that the work is being done as well as it could be, and it is certainly not being done as cost effectively as it could be. Responses are always more expensive than proactive intervention to stop the issue happening in the first place.
Okay. Thank you.
I think that Jim Fairlie wants to come in here. Is that right?
Yes. Alan Sutherland, you just said that stopping a problem from happening is probably a better solution than dealing with it after it happens. That takes me on to an area of questioning that the convener might try to stop me from talking about; it is a constituency issue. However, the point that I will raise was brought up in the minutes of your meeting on 21 September 2022, about the Glenfarg project.
The Glenfarg project is clearly being developed, and a lot of money is being spent on it, but it involves putting three or four storage tanks at the water source, for a system that is supposed to supply Glenrothes, which is 17 miles away. The piping to the system in Glenrothes has various leakages that are known about, but the storage tanks are being put in at the source rather than at the other end.
10:30You have raised issues in the past about the completeness of the information that you get from Scottish Water, and what you are not getting from it, to allow you to perform your regulator role. Do you have any oversight of the operational side of that? There is something that I do not understand. In one of your group meetings, in September 2022, David Satti commented that £799 million of funding had gone into Scottish Water, but he could not determine whether there had been any great improvements.
Now, I am hearing about a project that is getting several million pounds of investment, but the storage is being put in at the source rather than at the place where it will be consumed. If there is a leak or something else happens in the 17-mile pipe system from the source to the consumer, what is the point of having a storage system at the source when it could quite easily be at the consumer end? It makes no sense whatsoever. Are you able to answer that?
I wish that I could. I am not an engineer and I could not sensibly comment on the specific design of a particular project. However, I would expect that there is a full and proper appraisal that should be able to explain why Scottish Water has done what it has done.
Okay. The convener was probably right in not wanting to allow me to ask that question, but I have it now on the record.
I have given up trying to stop you, Jim. You are as tenacious as they come. I will just say that you have put the question on the record now and I am sure that Scottish Water will be listening to this.
We will be having that conversation.
I have no doubt that Scottish Water will want to respond. If I could get you to move on to the next question, I would appreciate it.
Absolutely. The committee is aware that WICS has raised concerns about the quality and completeness of the information that Scottish Water provides. I refer again to the meeting of September 2022. The minutes state that Alan Sutherland
“noted that it is difficult to understand the consequences of SW’s decisions for future investment needs. He asked how SW would report any disconnect between maintenance and asset replacement in terms of the long-term position.”
Are you getting the information that you require? There is a whole range of other things in the minutes—I will not take up the committee’s time going over them—that show, quite clearly, that WICS has not been getting the information or the information was not put to it in such a way that it could make a determination. Has the situation improved?
It is starting to improve, but it has not improved to anything like the level that it needs to get to.
Okay; thank you.
That is a telling comment. Monica Lennon has a question, and then I will ask some questions.
Jackie Dunbar’s initial questions touched on general performance and the public’s general perception of Scottish Water. I want to ask about the perception around sewage pollution, which is an issue that we raised with Scottish Water last week. That is an area of concern to communities and environmental groups. I am keen to hear from the panel what impact the local concerns and media reports are having on consumer perceptions and, importantly, trust in Scottish Water. I will start with Consumer Scotland.
Thank you for the question. We are in the middle of quite a large piece of research with consumers that has taken place over a couple of months, looking at some of the big issues in the water sector and how it adapts to climate change. Part of that is looking at CSOs—combined sewer overflows—and what consumers think about that.
The conversations are quite broad. The same participants come to the research sessions every week, so they are getting a real sense of the issues at hand, as well as an opportunity to discuss them in more detail. It is quite early in the process and the research is on-going, but we are getting a sense that consumers are concerned about CSOs. Although they understand that they are a function of the drainage system, the concept can feel quite unpalatable.
Consumers are interested in discussing the solutions, which is coming across quite strongly across a range of issues to do with adaptation. That is as important as the investment that will be required in order to make sure that CSOs are not operating when they should not be and that improvements are made where possible. However, there are other opportunities, and consumers are keen to learn more about them. They are not aware of many of the options, which could include reducing blockages or thinking about blue-green infrastructure, which has been mentioned, and the opportunity that that presents for removing rainwater from the system.
It would be good to hear more about the research. I am sure that you will not want to get into specific community examples. However, in some of the emails and letters that we get, people are very concerned about the impact of sewage on human health, nature and the environment. We have heard from Scottish Water that it does not accept how things are being characterised in the media and by some consumers and community interest groups. Is there a gap in the research and, if so, how can we address that? If there is a division between Scottish Water saying that it does not recognise those concerns and people getting increasingly vocal, how could we resolve that? I will put that to Fraser Stewart.
Our organisation is building its evidence base, but we are mindful of the messages that are coming back from the campaigning organisations and the constituency cases received by committee members. We are mindful that this is a live issue and that people, quite rightly, feel strongly about it. We have started to explore the issue, among many others, in the piece of work that Emma Ash has mentioned. The research is deliberative and has a lot of breadth as it looks at climate change adaptation as a whole. Part of it will be looking at CSOs and trying to understand how consumers feel about them for the country as a whole as well as how they impact them in their communities and as individuals. There are concerns around public health, as you have mentioned.
We see this as the first stage in building our evidence base. We are finding that the deliberative methodology allows us to dig deep into exploring the issue so that we can get away from the immediate responses. If you ask people a survey question about sewage spillages on a local beach, you will get an immediate reaction to that and most of us would be horrified by the idea of that happening. However, looking at the issue in a little more detail and using more qualitative approaches will allow us to dig deeper.
I offer a word of caution that this is from pre-analysis and we do not have the final report as yet, but the messages that are coming through from the research so far show that people want to have a say in what the solutions might look like. They are also looking for leadership from Scottish Water and from the Scottish Government. We do not just accept spillages as a factor of the system; there must be ways of dealing with the issue in the future so that we can live in nicer places.
That is a really important piece of work. Thank you for explaining it. Before I go to Alan Sutherland to get his perspective, will that research look not only at overflow events but also at dry spill incidents?
The piece of research is at a higher level; it will not look at specifics of wet and dry spills. We are moving towards thinking that we will probably have to do a bespoke piece of work in the future that will look specifically at that issue, because it is coming up as important when we are talking to consumers and campaigning organisations. The media coverage on it is quite extensive.
Thank you. That is really informative. What is Alan Sutherland’s perspective on that?
Like all of you, when I read or hear about people’s experiences, I say, “Urgh!” It is quite horrible.
However, I have some sympathy for Scottish Water regarding some of the characterisations that we read in the media. We read about raw sewage or something having been pumped into a river, but it was not pumped and it was not raw sewage—it was very heavily diluted. That is not to excuse it; I am simply saying that the media characterisation and the actuality are a bit different from each other. We get our information from the media and respond to the presented answer rather than the actual answer.
There are things that we have to think very hard about societally, and there are potential roles for the Parliament. For example, the fact that we allow gardens to be paved over so that people can park their cars in them increases the amount of hard-standing and therefore increases the amount of rain water that does not drain away naturally but finds its way into the sewers. People did not do that when the sewer systems were designed. That is a new problem, and it has to be dealt with.
In my introductory remarks, I talked about the levels of maintenance that we have been engaging in. We have sought to minimise costs and bills—there are good reasons for doing that—but that means that we have not maintained sewer systems with quite the diligence that we might have done. The odd brick or two out of place means that you use less water—it is like having a brick in your cistern. There is less room for the water to go through, so it is more likely to spill than it would have been if the sewer was in absolutely perfect nick.
When we look at solving that, we have to ask ourselves a really serious question. I differ from the Department for Environment, Food and Rural Affairs in England, which appears to be suggesting that one can build one’s way out of this. I do not accept that. The Thames tideway tunnel, which European legislation encouraged to be built in the year 2000, will be finished relatively shortly. The latest forecast is that it will be full a year or two years after it was built. Why did we not build that a bit bigger? We did not know.
When we look at potential rainfall patterns for 30, 40 or 50 years’ time, we see that there is no realistic way in which we are going to build an infrastructure that could cope with that amount of water coming so quickly, so we will have to do things very differently. That is where blue-green solutions, sponge cities and the reopening of culverted watercourses to become natural streams or rivers in cities will be critically important because, without them, we will simply not manage the levels of surface water that we will see in 30 or 40 years.
At one level, we should be looking at this as a really important learning experience for ourselves. We have to do things differently; if we do not, we will have a big problem on our hands. Things will get an awful lot worse if we try to stick our heads in the sand and pretend that we just have to fix a few CSOs. That is not the issue.
Thank you for very eloquently taking us through some of the big challenges and possible solutions. I will not go into that too much, because I know that we do not have time to do so.
To go back to Scottish Water, notwithstanding some of the wider challenges, which are not all within Scottish Water’s control, we have a potentially growing problem around CSOs and people are concerned about human waste ending up in our watercourses and the impact of that on public health and the environment. Scottish Water is saying that it is not getting its lawyers on to the media, and I asked it about that last week. I asked whether the stories are so wildly exaggerated that it is going to get its lawyers involved, but it is not doing that. We do not want to have a breakdown in public trust and confidence.
As good as it is to have all the research, I am sure that the team at Consumer Scotland has other things that it would prefer to be researching. What advice would you give to Scottish Water on speaking to communities and doing that education work, and ultimately doing better because we need better outcomes?
10:45
Scottish Water does a lot of valuable work, including in paid media and television, telling us not to flush wipes and so on. That is good. I gave you the future look at investment that I did—which concerns what happens in future because of charging decisions now—because I would like to see Scottish Water doing things an awful lot better. If it is to have a proper discussion with its customers, it needs to explain what the medium-term and long-term effects will be. My experience from sitting down with members of communities is that they really want to talk about such things over the medium and long term. They accept that things will go wrong in the short term, and they might not like that, but they want to know how they are going to get out of it. The more we can look to the future and explain why just building something new is not going to solve things and why we have to think differently, the better.
It is amazing, for example, to consider the differences in intensity of rainfall that we will get in 40 or 50 years’ time. It is quite difficult to believe it at first. However, if we look back into history we can see what has happened in the past five or 10 years, and we will say “Oh, all right. I get it.” We have to be exposed to that, however. That is where Scottish Water could do more.
That was very helpful.
Alan Sutherland, you talked about replacing a brick in a sewer—or potentially not doing as much of that work. We have all received a briefing from Unison, which is headed “Scottish Water—privatisation by stealth and union busting”. Unison makes the claim that
“Scottish Water is being hollowed out.”
There are clearly issues that will have to be addressed regarding the relationships between Scottish Water and consumers and between Scottish Water and its workforce. I am not going to get into the specifics of it, but I raise that because I want to come back to the point that I was asking you about earlier. When you are getting information from Scottish Water, do you have sufficient powers to compel it to give you the information that you require so that we can avoid such situations happening in the first place?
We have plenty of powers to ask for information and to require its receipt. We do not have any particular powers over the quality of that information, unfortunately—other than asking again, which is what we do.
It sounds to me like you are getting obfuscation when you are asking for answers to legitimate questions.
“Obfuscation” is a rather strong word. I would say that the information is not as good as it should be.
Let me give you a concrete example. We ask for a comprehensive annual return, which is based on something that the Water Services Regulation Authority—Ofwat—adapted from the Treasury back in the 1980s, so it has been going for yonks. Going back about 10 years, we would have had six, seven or eight queries on the information that we got from Scottish Water in a return. Last year, we had well over 100 queries. Those are essentially from people who are new in role or less experienced, or who are less diligent than their predecessors—I do not know which. The fact is, however, that there are many more queries today than there were before with the same return. I hope that gives you a clear indication of why we are frustrated.
I have some questions for you, Alan. In 2021-22, you raised approximately £4.5 million from levy. Is that right?
Yes, it was about that.
Of that, about £3 million goes to staff costs. It was £2.9-something million in 2021-22, but let us say £3 million, and that allowed you a surplus of £600,000 in that year to offset the £600,000 loss from the previous year.
Yes.
There seem to be quite big fluctuations between profit and loss. Is the levy right, or are you getting too much money in?
That is a good question, is it not?
I am sure that there are other organisations that have a worse revenue income level than we have, but in the period from 2021 to 2027, our income from Scottish Water goes up by 1 per cent a year—1 per cent nominal, not 1 per cent real—and our revenue from licensed providers goes up by 3 per cent nominal per year.
The fact that we have become increasingly active in supporting the Scottish Government’s hydro nation initiative has meant that we have done substantial projects in Romania and New Zealand, which have brought in a substantial amount of money. We have a surplus because, last year, we received more than £1.1 million from the New Zealand Government for our time and services and our advice.
We are talking about quite a large amount of money in quite a small budget. You have 26 employees and a £3 million wage packet. On average—of course, some employees will get paid more than others, will they not, Alan?—that amounts to £100,000 per employee before we add on the pension. Is that about right?
The salary cost in the accounts includes people’s base salary, their pension and the employer on-costs. All of those go into that salary number. However, your basic math is correct; to get the fully loaded cost of an employee, take the total salary cost and divide by the number of employees.
Basically, in that year, the top end of the salary scale is £185,000. We seem to be talking about quite big salaries for 26 people. Given that that money is raised from levy and there is a surplus in the year, one must ask whether we have got those figures right. Are you convinced that we have?
All that I can tell you is that it would be impossible for me to go out and recruit the analytical talent that I need in the market. I have to develop and train my own analytical talent. Each of the three directors who work for me, who are analytical in their bent, started their career with me at some point in the past 24 years. One has been with me consistently for 11 or 12 years. The other two were with me for a period, left to get more experience somewhere else and then came back. Both the ones who came back earn less now than they would have done if they had not come back. They came back for reasons of public service.
I am not suggesting that we are not well paid. We are well paid—there is no question about that—but we are paid less than the market rate for the job, if that matters.
No. My concern is that I want to know that taxpayers are getting value for money. Last week, we found out that, with bonuses, the salary of the chief executive of Scottish Water could top £430,000, which seemed a huge amount of money. It would be improper of me not to ask such questions.
Indeed. I make it clear to the committee that there are no bonuses—
I see that.
—and, in my case, there is no pension contribution, because I am not eligible for one.
I saw that as well. I read the accounts with interest.
As did I, convener.
Going back to customer charging, I have a question for Alan Sutherland. I had been going to ask whether you think that Scottish Water is striking the right balance in delivering on its investment commitments and keeping bills low for customers, but you touched on that in your opening remarks. Do you think that the charges should be increased more to the level that they could be at?
When inflation is running in double digits, it is incredibly difficult to get more money from people on many income levels in society. I go back to the convener’s question: should I pay more? Yes, because I can afford to pay more, but I am not typical. In that sense, none of us in this room will be typical.
The real question for us is how we are going to protect those who genuinely cannot pay. We in Scotland are better at that than they are elsewhere in Great Britain, because we charge relative to council tax; some forms of relief are available, and wealthier people in bigger houses are asked to pay a bit more. To be honest, however, I am not sure that that is enough. If we are going to have the sorts of revenue adjustment that are required for the industry, more will need to be done, but that is essentially a political decision. I can only advise and try to explain that raising revenue and increasing levels of indebtedness are not a way forward. An increase is sustainable only if people can pay it.
Do you think that we could slice the overall pot in a different way? Should the charge go back up to the consumer prices index plus 2 per cent? As you suggested earlier, if we do not go back to that, we are just going to store up problems for future generations.
You have to look at it in the context of inflation, wage growth and that sort of thing. You have to look at how much you are trying to raise and what else you could do to protect those who cannot pay, and there are things that could be done in that respect.
An in-the-round solution might be possible. I hope that inflation will start to come down, although I am not as optimistic as I would like to be about that. I hope that it will come down more quickly than some suggest, but it will be challenging. You cannot increase total revenues by 40 to 50 per cent in our case and by 100 per cent south of the border and not have some people struggling to pay. The question is about how to balance that and make it possible.
You said that you might have some suggestions for the Government. How do you suggest the Government raises that money without impacting the lowest earners?
Perhaps I can give you an example. In the past, I have suggested that the rate of relief, which is 35 per cent for someone on 100 per cent council tax benefit, could be increased marginally every year, which would mean a nominal freeze in that household’s bill year on year. It would go from 35 per cent to 36.8 per cent—I know that that is a spuriously accurate number, but I do spuriously accurate numbers—and then up to 38.5 per cent or something. That would mean that people who have been tested as being the most vulnerable and who are receiving 100 per cent council tax benefit would not see any increase. That would be quite a good thing to do, and the cost of doing that would be a rounding error and relatively trivial to the rest of us. We could look at doing that. Again, though, it is a political decision.
Do you think that it is right for customers to be paying more? You mentioned earlier that there are still problems with efficiencies at Scottish Water and the quality of information that you are getting. For example, there seems to be an issue with how Scottish Water is spending its money on bonuses. Do you think it is right to ask customers to pay more when there are still underlying issues with Scottish Water?
We must try to keep two things separate. The first is our need to invest for the medium to longer term, and I am suggesting that people pay more so that we can address our future investment needs.
I agree that there are steps that could and should be taken in relation to operating costs. Those costs should be trending down in real terms, but at the moment they are not. I would like to see that happen. Let me be absolutely clear: when we set our price caps, we assume that that efficiency happens. If it does not happen, we will start to ask questions when we reach the point of analytical confidence that it is not happening. We will explore why it has not happened and what will be done about it.
11:00
Do you think that it is right to pay those bonuses when efficiencies are not being met?
It is not for me to comment on the level of bonuses.
Okay.
I will turn to Consumer Scotland now. Perhaps you have not done any research on this yet, but is there an appetite for customers to pay more if more is going to be spent on the service, whether that means better quality or more value for money?
There are two pieces of research that might help. The first is our overall research, as part of which we are speaking to consumers about how we adapt to climate change and about investment in that respect. We will have a sense of what consumers think once we have more findings with regard to what the costs might be for them.
Secondly, there is some internal analysis that we have done. It is a piece of research that looks at the affordability of bills for consumers in the context of the water charge reduction scheme and other schemes that are available. It has not yet been published, but we will share it with you when it is. At the moment, the team that has developed the research is engaging with stakeholders.
The analysis shows that water poverty has fallen in the past couple of years, likely as a result of lower-than-inflationary increases in bills. The level of reduction in the water charge reduction scheme increased from 25 to 35 per cent, but we are likely to see that unwind if bills go up. That is the area where we are looking to develop some policy. We have the modelling, and we are looking at the different impacts of bill increases and what policy recommendations can be made on support for consumer groups, particularly those on a low income.
In developing that research—which, as I have said, we will certainly share with the committee—we have become aware that any increase is going to have an impact. We need to think about the pace of bills and communicating with consumers about how their money is being spent and why that needs to happen.
I gather, then, that you have not completed any of this research so that people understand that although they might be paying more, they are doing so because it is needed for the future. That work has not been done yet, has it?
Do you mean our research?
Yes.
It is on-going. We are still in the middle of what is a two-month workshop session with consumers.
Should the Scottish Government be doing more to help to ease the pressure on any increase in water charges?
The Government will have to think about certain decisions with regard to the water charge reduction scheme, but we are also conscious that people who are eligible for the scheme can often fall into debt, because they do not know that they are still liable for the charge. Although there is a 35 per cent reduction, they still have to pay some of the charge, even though they are exempt from the council tax. Sometimes that can cause confusion that results in consumers not paying, and they fall into debt as a result.
A couple of months ago, we asked the Government to consider asking local authorities to do a bit more to support consumers with ability-to-pay assessments when somebody falls into debt as a result of not paying their water charge, to try to stop the issue becoming bigger than it already is for those particular households.
Thank you.
My question is on the back of that last one. I am interested in getting a sense of whether the consumer research shows that consumers who can afford to pay might be prepared to pay more if it is linked to tangible environmental improvements. The question, crudely put, might be this: would people be prepared to pay an extra 30p if they get improvements in a river, a cleaner beach or whatever? Is that kind of thinking coming through?
It might be a bit too early to know that. Fraser Stewart might be able to comment.
It is very difficult for us to say that, based on our deliberative research, because the work is not about how much more people are willing to pay for climate change adaptation projects.
However, before the pandemic and the cost of living crisis, the previous customer forum did some work on pricing that showed that consumers were willing to absorb a small price increase to improve infrastructure for climate change purposes. That research is probably somewhat out of date now and there is an argument for revisiting the issue, given that things have moved on and that the country has had to face a few major crises.
As we are not doing any work at the moment on willingness to pay, it is difficult to say exactly what the appetite for risk is. It would certainly be worth exploring that further. We have a sense that people recognise that we have not got to where we want to be as a country, but we have not been able to use our consumer research to put a figure on that.
It would certainly be interesting to see what the research throws up, given that, as you have said, things have moved on. That is not only because of the pandemic, but because there is now a different narrative about how we use our water resources and the impact of sewage.
I have a question for Alan Sutherland about the role of WICS. Are you having to evolve your regulatory approach because of the challenges of climate change? I am mindful of Audit Scotland’s approach, which involves much more carbon counting and looking at how the public sector is delivering the long-term change that is needed. What does that look like for WICS? You were set up with a very specific remit under the Water Services etc (Scotland) Act 2005 as a predominantly economic regulator, but we are now in a world that is quite different to the one of 2005. How are you adjusting your regulatory approach to meet the challenges that we now face?
That is a great question. We are having to do things differently and, indeed, we want to do things differently.
There is a hidden suggestion in your question that economists are only interested in pounds, shillings and pence, which I do not think is quite right. It is certainly not right for me or the people I work with; we are very interested in externality costs, whether they come from carbon, social benefits or other sources.
I can give you a couple of examples of how things are different. In our most recent price review, we ring fenced an amount of money in light of the fact that some environmentally friendly investment solutions are cheaper in cash terms while others more expensive. If the carbon or other societal benefits outweigh the difference in cash, we will give extra cash for the more expensive, more environmentally friendly solution. That is an open offer, and it is out there for Scottish Water to take advantage of. It has not done so yet, but the promise was there that we would give it the money if it took those steps.
Turning my attention to green-blue natural solutions, I would say that one of the things that we are trying to encourage is the use of an appropriate timescale when considering the costs and benefits of such solutions. With a standard engineering appraisal, you might be looking at a project over a 20 or 25-year time horizon, but that will not show you the upgrades in concrete and future rebuilds that will be required beyond the time horizon of your analysis. What if I were to switch to just opening culverts and having natural river flow? Once I have done it, it is done. I might occasionally have to cut the grass around it, but I do not have to do anything else. If you use a 50 or 60-year time horizon, you will quite often see that sort of solution becoming cheaper than the standard grey solution.
The way in which you go about analysing the project will have to be different, which is why the need for long-term strategic thinking is as important as it is. That is what we are trying to do. We are trying to give Scottish Water as much flexibility as possible, but I think that it has taken the flexibility and been rather less good about the accountability of what it is specifically doing. That is what we have to rein back and get a degree of proper control over.
Thanks for that. That was a good, clear example of the challenges. I recognise your work in ensuring that externalities get internalised over a number of years, so please do not read anything else into what I am saying.
I have another question about the role of WICS. We are heading towards new legislation on water and sewage. Do you see the role of WICS and the way in which it is set up as fit for purpose for where we are now? Is there a need to look again at the role of WICS and its duties? Are you unable to comment on that, or do you not feel that there is anything worth commenting on?
My perspective is that the Parliament was pretty clever in what it asked us to do. Much as I would like to think that I value sustainable development and a climate-friendly Scotland as important things, I do not really think that it is for WICS to set policy. In fact, I know that to be the case. The increasingly important point is that the objectives that come to us to be costed need to be thought about in that broader space. I think that the Scottish Government has been moving in that general direction, but more could be done in that respect.
The consideration of charging separately for drainage and sewerage is probably sensible, because it will create incentives to harvest rainwater, manage the surface area, put down porous surfaces rather than hard surfaces and take other good measures. However, as the convener said earlier, people will only do these things if there is going to be a return on their money.
Thanks.
That is an interesting concept. It would require a massive amount of work on most properties and buildings to separate waste water from dirty water.
It depends on what you are talking about. If you are talking about the internal plumbing, that would be very difficult. If you are talking about roof water that goes from the drains and comes down through guttering, that could probably be done much more easily than something internal. There are things that could be done, and every little bit helps here.
I agree. I am just thinking about all the buildings that I see around Edinburgh that have gutters that disappear under the ground. I am not sure whether anyone knows where they are connected into.
I think that that goes into the same category as those paved-over gardens in central Edinburgh. It has the same effect.
11:15
Thank you.
Do members have any more questions on this section before we move on to the next bit? Monica, I think that you had a question on project delivery. Are you happy that it has been answered?
I had a broad question about net zero delivery and whether the panel agrees with Scottish Water’s assessment that it remains on track to deliver its net zero commitments.
Are you happy that the question has been answered or would you like Alan Sutherland to comment on that?
A yes or no might be the ultimate answer, but there might be nothing to add, because the jury is still out.
On net zero progress, there is always more that can be done. The day that a regulator is satisfied that enough is being done is probably the day that they are no longer a regulator.
Sarah, did you want to add something?
I just wanted to highlight that, at last week’s meeting, I asked about Scottish Water using its renewables infrastructure for income generation. To what extent does that infrastructure give it additional income that might help keep household bills down? I know that it is a short question on quite a complex issue.
It is quite complicated, but household bills will ultimately be kept down if Scottish Water earns a return above its capital costs on whatever non-core activities it is engaged in. Its only source of funding—the seed capital, if you like—for those activities is the profit that it makes in its core business or the profit that has already been made. That money gets reinvested, so we as customers are contributing to all of that. Hopefully, those activities will all earn returns and bring down bills.
However, it is not just a matter of bringing down bills; it is about the contribution that those activities are making to Scottish Water’s net zero challenge. That bit has to be monetised—or at least considered—too. If you do not want to monetise it, you will have to consider it in the same breath as the costs.
Thanks.
Thank you very much. That brings this session to an end, although we are going to keep some of the witnesses on. I briefly suspend the meeting to allow Alan Sutherland and Emma Ash to slip away.
11:18 Meeting suspended.