Scottish Water's second draft business plan Part A guidance

Business Plan Reporting Requirements and Definitions ManualAOVERVIEWIntroductionThe business plan is the key document from Scottish Waterfor the Strategic Review of Charges. The overviewsummarises the key points in the plan and their implications interms of:• Customers• Competitors• Costs• Compliance• Competencies.Business planThe Business Plan needs to be consistent with the generalprinciples established for the Strategic Review of Chargesprocess based around Scottish Water’s preferred strategy butwith sensitivities to its key material assumptions. These keyassumptions must be realistic and be set in the context ofexpenditure needs, the scope for efficiency and financingconstraints. The business plan should:• Enable Scottish Water to set down and explain in aconsistent and fair way its application for price limits• Take account of all the issues that Scottish Waterfaces over the period 2006-07 to 2013-14 andbeyond, including the quality improvements requiredby Ministers and guidance from regulators• Inform us of all the relevant factors that we need toreview the challenges facing Scottish Water anddetermine fair and reasonable price limits for ScottishWater consistent with its statutory duties.Scottish Water should set out its preferred strategy for 2006-07 to 2013-14 and in the longer term in the light of thisguidance. Scottish Water should to ensure that they drawtogether all the major issues facing them into an integratedplan, which is agreed and signed off by its Board.We will closely analyse the business plan to inform ourdetermination of price limits.We require the whole of the business plan to be subject toeffective and focused scrutiny by the Reporter, and, whereappropriate, by Scottish Water’s AuditorFormat of the business planThe business plan has four distinct but inter-related parts:• Part A Scottish Water’s strategy;• Part B Key components;• Supporting information (including the Q&SIIIinvestment programme submission, leakagestrategy, water resource strategy, sample drainagearea plan and sample distribution zone study)• Part D Public domain summary.Page 1 of 6

Business Plan Reporting Requirements and Definitions ManualPart A Scottish Water’s strategyScottish Water strategy is at the heart of the business plansubmission.No formal tables are required although Scottish Water maywish to draw on or refer to numerical data in other prescribedtables. The text should focus on explaining:• why the outputs have been selected for ScottishWater’s preferred strategy and, for the draft businessplan, for each reference plan;• the rationale for the balance of activities chosen todeliver them;• the resources required allowing for improvements inefficiency• the charges that Scottish Water considers itscustomers should pay.Scottish Water should explain how and why it believes itsstrategy, reflects its customers’ views on services and prices.Scottish Water may also wish to comment on whether withinits strategy it is able to balance the views of its customers withthose of other bodies, such as the quality regulators or theWater Customer Consultation Panel.Scottish Water should set out a clear summary of the outputs,activity and expenditure necessary to deliver these outputs,and the revenue required to secure Scottish Water’s financialviability within the strategy adopted for each of the referenceplans.We suggest that Scottish Water’s strategy should be dividedinto seven sections (see below) thus providing a frameworkfor Scottish Water to explain its strategy for the period 2006-07 to 2013-14, and in the longer term.Scottish Water strategySection 1 The overall strategySection 2 Achieving the right balance for customersSection 3 The post 2005 environmentSection 4 Strategic objectivesSection 5 Delivery of the strategic objectivesSection 6 Costs of delivering the strategic objectivesSection 7 Financial projections for Scottish WaterSection 1 – The overall strategySection 1 provides for Scottish Water to summarise itsstrategy, to identify the implications of the strategy for pricelimits and how these translate into average household bills,both in real terms and actual likely bills (money of the day)through the period. The forecast bills should also be clearlyrelated to Scottish Water’s current charging policies.Scottish Water should set down the key assumptionsunderpinning its strategy.Page 2 of 6

Business Plan Reporting Requirements and Definitions ManualScottish Water should highlight its assessment of its recentservice performance and whether it has incorporated anychanges in its proposed price limits to reflect this comparativeperformance. Any such adjustment would need to beexplained in relation to our policy for taking account of pastprojected performance.Section 2 – Achieving the right balance for customersScottish Water should use this section to explain how itsoverall strategy reflects the views of its customers on theoverall balance between service levels and prices and on thepriorities for improvements. This should include confirmationof the delivery of all the outputs required under Q&SII. Itshould take account of the latest consultation on service,quality, costs and standards.Section 3 – The post- 2005 environmentSection 3 provides for the Board of Scottish Water to setdown its views on the environment, in its widest sense, whichwill set the parameters within which it will have to operateduring the period 2006-07 to 2013-14. This wouldencompass, for example, Scottish Water view of changingdemands from its customers. This provides the opportunityfor Scottish Water to explain the position it has reached on therisks and uncertainties that exist or are likely to exist in thenext five years.Scottish Water should clearly set down its currentperformance and the state of its systems, especially itsinfrastructure and non-infrastructure assets, where these arerelevant to the environment in which it shall be operating.We need to understand Scottish Water’s strategy forachieving and maintaining leakage at the economic level andhow these figures have been derived.Section 4 – Strategic objectivesSection 4 builds on Scottish Water’s assessment of how thepost 2005 environment will influence its decisions on itsstrategic objectives for the period 2006-07 to 2013-14 andbeyond. These will cover both the policies it adopts and theoutputs it will deliver for its customers and the community overthe period. We need to understand how these strategicobjectives are reflected in charging policies. This is of generalrelevance to Scottish Water’s proposed price limits, but alsoof specific relevance as to how Scottish Water expects tomeet changing demands.Scottish Water should set out the strategic objectives that itwill want to achieve over the next price limit period and therelevant key outputs.Scottish Water should give an overall assessment on trendsin serviceability for customers. This assessment should relateto trends over the period preceding the submission.Section 5 – Delivery of strategic objectivesSection 5 provides for Scottish Water to explain how thedelivery of the strategic objectives translates into programmesit will have to carry out during the period. In many instancesthis will be the continued and improved operation of existingassets or maintaining and improving existing practices. Wherethe delivery of the objectives involves renewing, replacing orextending physical assetsPage 3 of 6

Business Plan Reporting Requirements and Definitions ManualScottish Water should report the levels of overall investmentactivity carried out in the current price limit period, and set outits projections for the 2006-07 to 2013-14 period. Investmentactivity will be carried out in order to maintain serviceability, orfor enhancement reasons, that is to ensure compliance withimproved standards of service to customers and theenvironment, or to maintain the balance between supply anddemandThe activity numbers reported in the Business Plan shouldform the basis of Scottish Water’s expenditure projections.The activity projections should be consistent with theindividual schemes appearing in the Q&SIII investmentprogramme submission.Scottish Water’s judgements about the scope for improvingefficiency should be explained and justified. They may beinformed by the comparative work published by us and byOfwat, the results of Scottish Water’s own work onbenchmarking its activities, or relevant work by others.Scottish Water should explain how it intends to improve itsefficiency over the period and thus be able to carry out thenecessary programmes at lower costs than would havepreviously been the case.Section 6 – Costs of delivering the strategic objectivesSection 6 provides for Scottish Water to explain and set downits judgements on the expenditure that it expects it will incur inmeeting the strategic objectives. These costs will reflect theearlier judgements on the activity/work needed to be carriedout and the improvements in efficiency that Scottish Water iscommitted to delivering. In other contexts, for example thesupply/demand balance, it will also reflect the extent to whichScottish Water has put in place charging policies thatgenerate the revenues commensurate with the costs ofmeeting changing demands. Scottish Water’s judgements onthe implications of the delivery of the objectives should besummarised.Section 7 – Financial projections for Scottish WaterThis section completes Scottish Water’s strategy. ScottishWater should set down the implications for its financialperformance and its judgements on revenue required to fundits strategic objectives. This should take account of impact ofimprovements in efficiency on the likely expenditure ofScottish Water within its strategy.Scottish Water should explain its decisions on how itproposes to finance its strategic objectives and the revenue itbelieves will be necessary to ensure its business is financiallyviable for Scottish Water’s strategy. Scottish Water’sjudgement about the cost of capital and its capital structureshould be explained and justified together with an explanationof its proposed dividend policy.Scottish Water will wish to set down any accounting policiesthat have a material effect on its judgements. In particular, wewill want to understand the level of current cost depreciationreflected for Scottish Water’s strategy and whether this iscomparable, over the long term, to the level of capitalmaintenance expenditure.Page 4 of 6

Business Plan Reporting Requirements and Definitions ManualGuidance to Reporters and AuditorsPage 5 of 6