WICS: Regulation must be more flexible to meet climate goals

The Water Industry Commission for Scotland (WICS) has put resilience and meeting net zero targets firmly at the top of its agenda, reflecting a clear message from the Scottish Government about what Scottish Water must achieve. Utility Week speaks to Alan Sutherland, chief executive of WICS about how uncertainty about the future has shaped the regulatory approach.

The Scottish Government has set a legally-binding target to be carbon neutral by 2045 – a full five years ahead of the UK as a whole. It plans to reduce emissions by 75 per cent by 2030 with ministers required to report progress on tackling climate change annually from each sector. There is a specific target for Scottish Water, which is even tighter – it must be carbon neutral by 2040.

For the water sector, it is ministers who make decisions on future levels of service, growth and climate targets, among others. This is different from England and Wales where Ofwat as regulator has duties in relation to resilience, affordability and sustainability.

WICS does not have to balance these considerations. Instead it is tasked with finding the most economically effective option for carrying out Scottish ministers’ objectives.

For the upcoming price control period 2021-27, for which WICS published its draft determination earlier this month, a flexible approach was adopted to acknowledge that the way in which those ambitious targets are reached could change over the six-year period.

“It’s a pretty daunting challenge and to be honest we don’t know how it’s going to work yet,” Sutherland admits as he explains their methodology for asset management. “But we know we don’t want to create artificial barriers that could stop it working.”

How projects contribute to wider goals around carbon, natural and social capital will be considered with an emphasis on nature-based solutions and other alternatives.

“We want to be as flexible as possible,” Sutherland says. “At the moment, we all think we have a reasonable understanding about operational carbon footprints but I don’t think anyone would claim to understand how we will reach net-zero on the embodied carbon that is inherent in any asset base.”

He explains that defining the capital investment programme and tying down Scottish Water – as WICS would historically have done – could hinder reaching a net zero position across both operational and embodied carbon by 2040.

“We’re not saying we’ve cracked the problem but what we’ve been trying to do collectively is not make it more difficult for ourselves than we potentially could have done.”

Greater investment is being permitted in asset maintenance which has been separated out in a novel way based on what future needs will look like.

WICS identified the need for “a lot more money” to be available for significant refurbishment and replacement of assets than has previously been the case. By 2040 this could be up to 2.5 times higher, so bill rises are inevitable to future proof the service.

Sutherland says the age of assets isn’t the only problem: “The industry hasn’t done itself any favours because it has played the ‘ageing assets’ card frequently, certainly in the long time I’ve been around, but it is more complicated than that.”

A case in point, cast iron water mains built in the post-WW2 period of investment can be in worse condition that those installed 50 years earlier. “It seems counter intuitive,” he explains, “but it appears that post-war quality of available materials and a depleted workforce resulted in assets from that time being of a lesser quality.”

Another example is found in new town developments from the 60s and 70s where asbestos cement mains, which although newer, are in worse condition than assets in Glasgow and Edinburgh that date from much earlier times.

Another “surprise” was the level of investment required for mechanical electrical instrumentation – the “bolt-ons” such as membranes, electrical parts of filter beds and telemetry that have ensured compliance over the past few decades but typically have much shorter asset lives.

“In terms of replacement cost, it’s a small percentage of the total costs but because the asset life of these are much shorter than civil structures the annualised cost of replacing these things tends to be greater. They need replacing more often but at a smaller cost compared to civil assets, but compliance has been achieved by significant investment in these.”

Investment needs support from billpayers, who have been involved throughout the writing of the company’s Strategic Plan via Customer Forums. This engagement has been underpinned by research into customers’ needs and interests that showed customers want high-quality, value for money services and for Scottish Water to provide broader societal benefits and to help tackle climate change.

Sutherland says consumers became more heavily involved in price reviews from 2015, and 2021 is the natural progression of that process.

“We realised this time around that customer involvement needed to be in much more than just prices. There needed to be more detailed involvement about what the future held and implications for what future customers would be. We have been on a bit of a journey. This review is very different but is a logical follow-on from the last.”

A significant change has been to do away with company commitments and targets that are central to the model in England and Wales.

Historically WICS would have set targets for customers service, leakage and everything else but this time because Scottish Water has targets on resilience and net-zero emissions the regulator has said, on the assumption the company can evidence why they require the money, part of communicating to billpayers about increases will necessarily being clear about what levels of service customers can expect.

“Rather than us setting artificial targets, we expect the company to work out a series of targets or commitments that they would report on, so the trust of customers and other stakeholders is established and build upon. For example, Scottish Water will now lead a national engagement programme to understand the views of customers and communities across the country.”

He says although the model is different between Scottish Water and the privately-owned companies in England and Wales, both are concerned about their ability to do the job in the right way.

“The additional concern Ofwat has is if they allow more money to companies, will it be invested or will it find its way out of the system to shareholders? There are no shareholders or dividends to worry about,” Sutherland says.

“The challenge is the same in any regulatory system to think about the long term, but that requires everyone to be committed to the long-term – regulators, shareholders, management, quality regulators, government and other stakeholders.”

The test will come over the next decade as the goals approach and the efficacy of the approach becomes clear. The regulator underlines they know they do not have the answers yet but they are ready to adapt, change and evolve as an industry to play its part in meeting one of the most ambitious climate commitments of any nation.