Scotland's independent economic regulator of the water industry has praised Scottish Water's performance – but expressed serious concerns about funding for the current capital investment programme.

The comments come in the Water Industry Commission for Scotland's (WICS) 2010-11 Annual Report and Draft Accounts which were laid in the Scottish Parliament today.

Among the issues highlighted in the report are the benefits to some 47,000 customers (around 42% of the market) in the three years since the retail market was opened to competition for businesses and public sector organisations. Sir Ian Byattt, current Chairman of WICS, said the incumbent, Business Stream, had “sharpened its pencil” and the City of Glasgow was already saving £1 million a year under its new contract.

The report says analysis by WICS showed that the net present value (NPV) of the introduction of retail competition in Scotland is £330 million and that even taking “a relatively modest view of savings that may be available south of the border”, the NPV of the savings for England and Wales could exceed £2.5 billion.

The price limits set by the Commission for the five years 2010 to 2015 involve a reduction in tariffs of 5% below inflation. Tariffs have now been frozen for two years running; for the next three years’ increases will be limited to the rate of inflation.

Concern about funding for 2011/12

However, the Commission expressed concern about the adverse consequences on the water environment of the squeeze on the public finances now threatening Scotland.

In 2009, the Commission set prices on the assumption that borrowing of £140 million a year would be available from the Scottish Government budget. With no lending programmed for the current financial year 2011/12, Alan Sutherland, Chief Executive of WICS, said that unless resources become available in one way or another, Scottish Water would not have sufficient funds fully to carry out its five-year investment programme

WICS Chairman Sir Ian Byatt is due to stand down next month – he will be replaced by Professor Gordon Hughes, who is currently a Commissioner on the Infrastructure Planning Commission.

Commenting on the Report, Scottish Assembly Cabinet Secretary for Infrastructure and Capital Investment Alex Neil said that Scottish Water was delivering more for less with operating costs now 35 per cent lower than they were in 2002, describing it as "a transformation unprecedented in the UK water industry."  Mr. Neil said he had set Scottish Water a target to provide one of the best value for money water and sewerage packages in the UK by 2015 but made no mention of funding issues.