One of the early challenges to our ‘I3 Project’ (short for Incentives, Innovation and Involvement) was on the need for change. Why was this upheaval necessary when the level of service and value for money provided by the Scottish water industry to its customers has substantially improved over recent years (as our recently published Performance Report highlights)?
In large part our regulatory approach relied on robust comparisons with the performance improvements already achieved by the companies in England and Wales. This benchmarking enabled us to challenge Scottish Water to improve its performance to match that of the leading companies – a challenge to which it has responded well.
There are three reasons for change.
- This benchmarking has run its course.
- It is now clear that investment to improve the quality of drinking water and the water environment is an ongoing requirement; as such it is important that customers understand and are willing to pay for further improvements.
- The reduction in our own budget means we need to find a way to identify and understand customers’ priorities in order to focus resources where they add value.
The scale of Scottish Water’s improvement means we can no longer rely on benchmarking comparisons – the gaps are just too small to draw definitive conclusions. There now has to be a question over the extent of information that the regulator collects. If, for example, Scottish Water finds 40% of the typical regulatory return to be useful in managing its business, should the regulator need any more than 50% of this subset – if his purpose is to regulate rather than to run the business? These proportions are probably both too high – but even they imply a reduction in the information collected of 80%. But in making a reduction (and ours will be of the order of 90%+) we have to ensure that we understand the hows, whys and wherefores of what Scottish Water wants to tell us....
We are moving to the Cold War End Game – a case of trust but verify. This explains our change to the role of the Reporter. Here we seek to replace an engineering review of regulatory information with targeted scrutiny of issues that Scottish Water, the Customer Forum or the Commission considers could be useful. The Industry Assessor – as the new role will be known –is likely to be an experienced industry leader supported by a multi-disciplinary team that could examine any aspect of Scottish Water’s performance.
In considering the future of the regulatory framework, Scottish Water and WICS concluded that there are three critical issues:
- how best to encourage innovation;
- the use of new incentives to encourage further efficiency and more sustainable outcomes; and
- involving customers in decision-making, particularly in determining how and where service should be improved.
All three will be crucial to keeping bills down, minimising borrowing needs and delivering the services and value for money that customers want. The onus will now be on Scottish Water to identify projects that are positive NPV and increase the scope for innovation – and if they feel a higher return is necessary to pursue these projects to explain why. This forms the basis of our I3 project.