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Scottish Water: A Model Of Regulation And Good Governance?

Congress: 2015
Author(s): Sarah Hendry (Dundee, UK)

Sarah Hendry
Centre for Water Law, Policy and Science under the auspices of UNESCO, University of Dundee1



Keyword(s): Sub-theme 15: Water law,
Abstract

This paper is suggested for inclusion in the Management of Water Resources Sub-Theme: "Public and Private Sector Involvement in the Water Sector: Successes, Failures and Constraints". Alternatively the organisers may consider it more appropriate within the 'AIDA' stream of law papers. It is intended to be delivered along with a 'sister' paper presented by Fiona Parker of Shepherd and Wedderburn along with the Water Industry Commission for Scotland. * Introduction -- Scottish Water (SW) is a national public corporation, providing water and wastewater services to most households and businesses in Scotland. Formed from a merger of three regional boards, which in turn were created when regional councils were disbanded, SW has a unique legal framework and governance model which demonstrates the possibilities for public sector service providers to operate efficiently and effectively. Further, the Scottish model opens a debate about the relative roles of ownership, regulation and competition in service provision. In addition, in the latest price review, an innovative mechanism has developed to better account for customer views in price setting. As most water services around the world are delivered by the public sector, and most assets will remain public, examples of effective regulation should be of considerable interest. * Methods/Materials -- This paper will present an overview of SW's governance model and an analysis of the relative importance of the roles of ownership, regulation and competition for effective service delivery. It will also present some discussion of recent developments in customer representation, where the most recent price review introduced a negotiated settlement of the business plan between SW and a new Customer Forum, under the overall scrutiny of the economic regulator, the Water Industry Commission for Scotland. The 'Scottish model' includes some private sector participation (PSP), and a sister paper will look at these elements and their impact on the model, including licensed competition for retail services for the business sector and most recently, the impact of the opening of a similar market in England and Wales. * Results and Discussion -- In Scotland, water services remained public in the 1990s despite full divestiture in England and Wales. A regulatory model was adopted similar to that in England, using competition by comparison against the English water companies. After some years of intensive regulatory scrutiny and challenging efficiency targets, SW's performance has improved to bring it into line with the top quartile of comparators. The debate in Scotland has moved from asking whether it is possible for public sector to operate at private sector efficiency, to asking whether in fact the public model, and a public service ethos, makes the regulatory process more straightforward and less constrained by shareholder interests. Although the structure of a single national public corporation would not be appropriate in every state, the underlying principles of making costs and charges transparent, and assessing them against a matrix of regulatory requirements (social and environmental, as well as economic and technical) offers many positive lessons. More recent initiatives to better represent customers through a negotiated settlement may be seen both as a way of lessening the regulatory burden, and as a development enabled by the effectiveness of that regulatory process over time. * Conclusion From a position of weakness and underinvestment, where the extent and value of the assets were unclear and (despite being in the public sector) there was little transparency, SW has developed into a highly effective vehicle for public sector service delivery. It has achieved significant efficiencies through a robust regulatory process initially designed for the private sector and allowing for competition by comparison and stretching efficiency targets. Before and during the most recent price review, the process has compared well against the divested model of English utilities, where the (inevitable) tendency of boards to maximise the interests of shareholders has seen much tension and public criticism. The paper will conclude that a public sector ethos, within a transparent and accountable regulatory framework, enables better outcomes for consumers; and further, that this ethos and those outcomes have been exemplified by the use of a negotiated settlement in the latest price review. It will offer suggestions as to the usefulness of this model in other places, and also reflect on the cyclical nature of regulation.

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