The outcomes of the WICS review into regulatory methodology A presentation given by Chief Executive Water Industry Commission for Scotland Water 2010 Alan Sutherland London, 13 October 2010 Alan Sutherland Water 2010

13 October 2010 Water 2010, Alan Sutherland, London 2 Significant progress has been made in the Scottish Water Industry over the regulatory period... Scottish Water outperformed the regulatory settlement. The “world’s first” competitive retail market for non-household water services opened in April Progress to date has been encouraging – c.40% of non-household customers are now on a better deal as a direct result. Experience from the market appears to show that customers are more interested in tailored, targeted services rather than price cuts. But there is no room for complacency – legitimising customers’ bills means putting customers at the heart of the process

13 October 2010 Water 2010, Alan Sutherland, London 3 We acknowledge that, at present, there are a number of barriers that may deter customer participation Compexity: simplifying the price setting process could facilitate greater participation. Too late to influence: involving customers earlier would allow their views to be reflected more effectively in any final deal. Relevance to the customer experience: customers need to understand the costs and benefits of environmental and public health improvements. Planning for the Long-term: looking beyond the five-year period could allow for more innovation to be realised – benefitting customers.

13 October 2010 Water 2010, Alan Sutherland, London 4 Our provisional timeline envisages seven steps... StepWhenMilestone Customer interaction 1 Q The Commission sets out key regulatory principles and financial framework Ongoing customer negotiation 2 Q The customer counterparty rules of engagement and strict governance functions in place 3 Q Scottish Water will publish a draft strategic business plan covering the next 25 years 4 Q The Commission reviews and comments on the plan 5 Q Scottish Water issues final version of the 25 year strategic plan and a draft of a business plan for a proposed agreement period. The Commission sets out plausible ranges for key inputs. 6 Q Final business plan generated for agreement of customers 7 Q An agreement is formalised, or a determination is made by the regulator

13 October 2010 Water 2010, Alan Sutherland, London 5 We are continuing to work with Scottish Water and other stakeholders to agree both the principles and the process that will sit behind these milestones... Scottish Water must own its Business Plan. It would then be obliged to seek agreement of its plan with customers. The Commission will comment on the plan, setting out indicative ranges for key inputs to help inform the customer negotiation. The Commission would have a “Plan B” if Scottish Water fails to reach an agreement with customers. There will be a change in the role of the Reporter. There will be a incentives to encourage longer term, more innovative approaches.

13 October 2010 Water 2010, Alan Sutherland, London 6 There is, however, still work to be done... We need to define the governance arrangements for the customer counterparty. We need to develop our understanding of the economic costs of the industry. However, we remain of the view that the cost of water and wastewater treatment processes are higher than suggested. This may present opportunities for more asset rationalisation and, potentially also, reconfiguration better to suit customers’ needs. There may also be benefits in trading treated water in areas closer to the Scottish border...

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