Investing in future water services

44

Investing in future water services At a glance

Household water and waste water charges in Scotland are among the lowest in Great Britain. Customers have told us that their preference is to continue with stable charges (charges that increase no more than inflation) to allow investment to further improve services in the areas that customers have told us are a priority.

Most of Scottish Water’s annual budget – and the charges customers pay – is currently spent on maintaining existing service levels for customers and for paying interest costs for historic investment in their services.

Maintaining existing service levels

18p

Our expectation of future costs: We will continue to look for ways to be more efficient in how we deliver services and have taken these into account in our projections, but we expect that our maintenance costs will rise as existing treatment works – built in the last 15 to 20 years – are refurbished. However, we expect the number of customers will also rise, which could help to keep costs for everyone more stable while maintaining services.

In our projections we have assumed that investment to meet statutory obligations, based on known requirements, will reduce over the next 25 years. We expect that our future capital investment requirements will remain around £500 million per annum (in 2012/13 prices) as a result of increasing capital maintenance requirements and ongoing investment to improve services to meet customers’ expectations in areas of water supply resilience and the prevention of flooding from sewers.

Over the years Scottish Water has taken out loans to efficiently finance investment, to make improvements to services and meet statutory obligations. We will continue to incur interest costs on these loans over the coming years and on new loans taken out to finance our proposed statutory and service improvement plans.

Scottish Water

Interest costs for historic investment in your services

75p

4p 3p

Meeting new statutory obligations Improving our service provision

Every £1 of customers’ charges in the future contributes to these 4 areas.

Our strategy to improve services: We plan to increase investment for service improvement to around 3% of what you pay to further improve services in the areas of: • Reducing interruptions to water supplies • Reducing flooding from sewers • Investment to support reducing long-term costs • Encouraging water efficiency • Improving the customer experience of our services

Introduction Chief Executive’s statement

Providing continuous high quality drinking water

Protecting and enhancing the environment

Supporting Scotland’s economy and communities

Investing in future water services

45

About Scottish Water What might the future bring?

Listening to our customers Our strategy

Most customers trust that they will continue to receive 100% service reliability, and that we will make further improvements where required.

Our financial projections are therefore based on meeting those customer expectations and our anticipated statutory obligations.

We have reviewed long term investment requirements and efficiency opportunities.

We believe that we should be able to meet our statutory obligations and deliver the proposed improvements to services that our customers expect while keeping charges broadly constant in real terms (i.e. excluding the impact of inflation).

This assumes that the Scottish Government will make available facilities for net new borrowing of around £120 million per year to support an overall investment programme of around £500 million per annum (in 2012/13 prices).

Our projections are based on assumptions about future economic circumstances and the day to day costs of running the business. For example, the overall number of customers we serve can have a significant effect on the long term charges’ projection, as can significant cost increases such as business rates or long term interest costs.

If we are able to outperform a regulatory settlement, the benefits would be passed

to customers through lower prices and/or accelerated service improvements. Should circumstances be significantly adverse to our assumptions we would expect to adjust our investment levels, which could affect the rate at which we deliver the planned service improvements, or seek additional borrowing facilities to allow planned investment to continue.

Operations and maintenance costs Around two thirds of the total annual costs to deliver your water and waste water services is spent on operations and maintenance to deliver current service levels. Our forecast expenditure to operate and maintain our assets take account of expected efficiency opportunities and our strategies for asset rationalisation and productivity improvement.

We expect that the real terms cost of maintaining service levels will increase by around 0.5% per year. The main reason for this is the cost of refurbishing many of the new treatment works that were built over the past 15-20 years to improve the quality of services.

However, as our customer base is also forecast to increase by around 0.5% per annum, we expect that the real costs per customer will remain broadly the same.

Forecast average annual costs £m per annum (2012/13 prices)

1,200

Base operation and maintenance costs

1,000

Financing costs New demand costs New statutory obligations costs

800

Service improvements costs

600 400 200 0

2010-15

2015-20

2020-25

2025-30

2030-35

2035-40

Strategic Projections 1200

46

New demand costs

Improving services costs

We expect the costs of providing services to meet new demand from both households and business premises to remain broadly stable.

However, there remain significant opportunities and risks associated with our assessment and over time we will understand the scope of full benefits that can be realised from our water efficiency and surface water management approaches. If successful, these could reduce the longer term demand for investment to provide additional capacity to meet new demands.

The table on page 47 sets out our forecast service levels in the areas that customers have identified as a priority for further improvement that are not otherwise addressed by new statutory obligations investment. In our projections we have assumed that we will improve services in all these areas.

Many of our planned improvement approaches are innovative and require collaboration with customers and other stakeholders to achieve the outcomes shown.

New statutory obligations costs

In our projections we have planned service improvements at a rate that is supported by prices that rise slightly below the level of inflation.

We expect our investment to meet statutory obligations associated with environmental legislation to reduce over time allowing more investment for improving service levels in other areas and investing to reduce long term costs.

We expect our investment to meet statutory drinking water quality standards to continue over the next 25 years due to our programme of works to upgrade unlined iron water mains (the main cause of drinking water discolouration problems).

Financing Around 18% of bills paid by customers go towards paying for the historic and ongoing debt that underpins the historic investment in the assets that deliver your services today.

These costs may reduce as some of the debt is cleared and opportunities to refinance are realised. However, a rise in interest rates could affect longer term costs.

Scottish Water

Getting the balance right

Our customers have told us in their responses to Your Views Count that the majority wish to see further service improvements and that price increases around the level of inflation are acceptable in the long term. The Customer Forum has advised us that its research suggests there is an acceptance that prices will rise, but that we need to consider customers’ economic circumstances in each price control period when considering the appropriate balance between prices and the rate of service improvements.

48

Scottish Water