Inter-generational equity and the strategic review of water charges in Scotland

Since the foundation of Scottish Water in 2002, over 60% of its net new capital formation has been funded direct from customer charges. This runs explicitly counter to Ministerial policy at the start of the period, which was that net new capital formation should be financed from borrowing: and it effectively means that the Scottish Government has been able to use water charges as a concealed form of taxation. This paper explains how this situation came about, and identifies key resulting issues: these include:- Problems of intergenerational equity. - The question of whether funding so much capital expenditure direct from revenue was cost justified at a time of historically low interest rates. - The opportunity foregone to have lower water charges for the benefit of domestic customers and industry. Current proposals for the forthcoming Strategic Review of Charges threaten to make these issues even more acute. The paper argues that what is needed now is a thorough review of the approach to water charging, to address the above issues.