A recommendation on how the method of setting water prices in Scotland should be changed : customer financed capital as a notional loan to the utility

Cuthbert, Jim and Cuthbert, Margaret and Lockyer, Cliff (2009) A recommendation on how the method of setting water prices in Scotland should be changed : customer financed capital as a notional loan to the utility. Fraser of Allander Economic Commentary, 32 (3). pp. 37-45. ISSN 2046-5378

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    Abstract

    It is difficult to over-estimate the importance of setting prices appropriately for a major utility like water, given that inappropriate pricing can cause unnecessary damage to the comparative competitiveness of a country’s economy. In an earlier article in the Commentary, (Cuthbert and Cuthbert, 2007), we gave a critique of the current cost regulatory capital value (CCRCV) method of utility pricing: a method used, for example, in setting revenue limits, and so prices, in the water industry in Scotland and in England. While that article identified significant problems with the CCRCV approach, we did not make detailed recommendations about how these problems might be rectified. This paper makes a specific proposal about how CCRCV should be modified: our proposal is particularly well suited to the circumstances where, as in the case of Scottish Water, CCRCV pricing is being applied in a publicly owned utility. We argue that implementation of the proposed approach would have a number of advantages: in particular, it would lead to significantly lower water charges, while being fully sustainable well within current levels of public expenditure provision; it would reduce the likelihood of eventual privatisation of the water industry in Scotland; and there is the technical advantage of greatly reducing the cost to the Scottish Budget of the capital charge levied by the Treasury on the assets of the water industry in Scotland.