An economic analysis of water use in the Scotland river basin district

There are three categories of cost associated with use of the water environment. These are:

In Scotland we are still learning about the usage of much of the water environment and there are significant technical issues associated with quantifying environmental and opportunity costs. As a result it is often only possible to make some broad generalisations.

Research was commissioned to establish the extent of cost recovery in Scotland (the Operation of the Scottish Water Market³⁸). This report highlighted the limits of our current knowledge in this area and led to the identification of gaps requiring further investigation.

In England and Wales there is significantly more information available and cost recovery data for the private water companies is more readily accessible. Steps are being taken to harmonise the presentation of cost recovery data between Scotland and England and Wales; comparability will improve in future.

The vast majority of users of the water environment are private individuals or organisations that are not funded by government. While little is known about the costs incurred by these private users, it can be concluded that they pay the direct costs of their water use.

There are two large users of water that are publicly owned in Scotland: Scottish Water and British Waterways. Scottish Water is subject to economic regulation by the Water Industry Commissioner who has published a large amount of information on Scottish Water’s costs and revenues. From this information it can be concluded that by meeting published efficiency targets Scottish Water would recover their direct costs from their customers.

Scottish Water charges and capital expenditure are determined by Scottish Ministers through a cycle of investment planning, called Quality and Standards (Q&S). The current investment cycle, Q&SII, runs from 1st April 2002 to 31st March 2006. This planning process is supported by a strategic review of charges, carried out by the Water Industry Commissioner, to assess the effectiveness of Scottish Water proposals against comparable water companies and set out the likely effect on customer charges. Recommendations from the review are used to inform the final determination by Scottish Ministers and set a ceiling on the total level of annual expenditure, borrowing, charges and operating efficiency to which Scottish Water must conform.

British Waterways (in Scotland) is funded by a grant from the Scottish Executive, trading income and restoration, and third party contributions. They aim to break-even each year and the level of grant and their work programme is adjusted accordingly. In recent years there has been considerable investment on a backlog of safety related issues and this has now been cleared. In 2003/04 British Waterways (Scotland) produced a small operating surplus. Overall British Waterways (UK) ran an operating loss. They have submitted an economic case study and this is available on the SEPA website³⁹.

Point source discharges are currently regulated by SEPA under the Control of Pollution Act 1974. SEPA imposes charges on dischargers so as to recover the direct regulation costs.

While this regime prevents some environmental costs being incurred as a result of point source pollution and covers the direct costs of enforcing this regulation it does not amount to cost recovery of environmental costs for point source discharges. For diffuse pollution, abstraction, impoundment and engineering works there are currently few, if any, controls and no recovery of environmental costs.

Put another way, currently some users of the water environment are restricted in the environmental damage they can impose in some activities and they pay for the costs of being regulated. However, they do not pay for the environmental costs that they cause. While it is not possible to reliably quantify this cost the environmental pressures and impacts⁴⁰ report shows the extent of the pressures caused by water users.

Opportunity costs are particularly difficult to assess and are often caused by abstraction on which data is very limited in Scotland. The lack of comprehensive regulatory or market mechanisms to ensure that opportunity costs are paid indicates that this cost is not recovered from polluters. Given the limited available data it is not possible to assess how large these costs are and hence how significant an issue this is. However, as Scotland is a water rich and sparsely populated country it can be inferred that, compared to the rest of Europe, opportunity costs of water use are likely to be low.