Summary of the Director's conclusions

Cost-reflective charging and vulnerable groups

Application of price reductions in April 2000 (the P_o adjustment).

Timing and methods of payment

Optional metering

Annex B – Respondents to the consultation

Annex C – Glossary

SUMMARY OF THE DIRECTOR'S CONCLUSIONS: CHARGING AND METERING POLICIES TO BE FOLLOWED IN 2000-2001

The Director will require all companies to implement the following policies within their charges schemes for 2000-2001 in order for these to gain approval.

They are grouped in relation to the four issues raised for consultation. These policies have regard to the Secretary of State's draft guidance to the Director.

Cost-reflective charging and vulnerable groups

• Tariffs for vulnerable groups: The Director confirms his view that decisions about protection for particular customer groups are essentially matters for Ministers – to be implemented through legislation rather than by the economic regulator. In draft Guidance Ministers have confirmed their intention for the charging year 2000-2001 (for companies operating wholly or predominantly in England) to introduce Regulations under which vulnerable groups would receive specific charging protection. The Director believes this is right. In view of this he will be reluctant, therefore to approve the introduction by companies of new social tariffs for 2000-2001. It will be for companies themselves to propose whether any existing tariff provision for vulnerable groups should continue in the light of the Regulations to be made.
• Regional average charging: In response to comments made in the consultation, both from CSCs and from companies, the Director considers it appropriate to re-state his position on whether companies should apply regional average charging. The Director believes that whether companies set tariffs on a regionally averaged basis is for them to propose. However, he also considers that if companies propose to reflect costs in charges on a local basis, they should do so for all classes of customers and not just for some (eg only for large users). The Director also has a duty to protect rural customers.

• The balance between water and sewerage charges: In the draft determinations published in July 1999, the Director set out indicative splits of Ks for companies to follow in setting the relative level of water and sewerage charges for 2000-2001. These were set on the basis of companies achieving an equalised rate on return on each service for that year. The Director believes that, while an indicative split of Ks best meets the objective of ensuring charges are cost-reflective on a year-by-year basis it would not be sensible for charges for one service to be reduced significantly in the first year of new price limits, only to be increased in subsequent years. This could happen for a number of companies if the indicative limits presented in Draft determinations: Future Water and Sewerage Charges 2000-05, Table 9 were strictly applied in April 2000.

  In those cases where this is a consideration, companies should in their draft charges schemes set charges for each service, within the overall price limit set, so as to equalise rates of return on each service over the full period of the price limits. Companies' proposed price limit for each service will be discussed at the autumn tariff meetings. Final decisions about the preferred indicative split of Ks will then be made at the time of Ofwat's written comments to companies in December 1999.

• Measured/unmeasured tariff differential: In the 1999-2000 Report on Tariff Structure and Charges, the Director set out his views on the level of the tariff differential in 2000-2001. For next year he expects the tariff differential to be maintained at the 1999-2000 level of £30 a year, indexed by RPI, ie held constant in real terms. This is consistent with pursuing a national level for the tariff differential. While there may be arguments for increasing the level of the tariff differential there are also arguments for decreasing it.

  For subsequent years, however, the Director is ready to review the level of the tariff differential, particularly in the light of the development of companies' metering policies. Any decision reviewing the tariff differential would be subject to consultation.

• Structure of measured tariffs: The Director believes that companies need to maintain proper incentives for the efficient use of water within the structure of the measured tariff in 2000-2001. Volumetric rates should be set to encourage customers to use water efficiently. Standing charges should therefore fall by a greater amount than volumetric rates.

  Most companies in recent years have progressively lowered the levels of non-household standing charges. For some companies, however, standing charges for non-households remain high. Accordingly, companies should reduce such standing charges to gain approval for their charges scheme.

• The balance between trade effluent and sewerage charges: The Director will require companies to maintain or move towards a balance between charges for trade effluent and their domestic sewerage charges. This balance will be assessed by the Director in the light of the calculation of the weighted trade effluent/sewerage differential (ie reflecting the average level of sewage treatment).

  Companies will be expected to bring their charges into balance within ± 5p per m³ in 2000-2001 (see Table 23 of the 1999-2000 Tariffs report), unless this would result in trade effluent charges having to rise significantly. In this case the Director will accept a phased rebalancing to reach the target differential in 2001-02. The scope in 2000-2001 for reductions in trade effluent charges in some companies, therefore, may be limited.

• Surface water drainage charges: The Director considers that all companies should provide for rebates for non-connection for all customers in their charges schemes from April 2000, or should provide an acceptable plan to phase in rebates in the next two charging years. Companies should set out in their charges schemes how they intend to achieve this provision. Rebates, however, would not be expected to be retrospective. Companies must ensure these provisions are indicated on household customer bills.

  Some companies have indicated they wish to move the basis of their charges for surface water drainage onto a site area basis. It is clear from the experience of one water and sewerage company that such a move will give rise to significant incidence effects on some customers. Until companies have developed a strategy satisfactory to the Director as to how such effects should be handled, companies should not plan to implement such a change in the basis of charging for surface water drainage.

• Water for discretionary purposes: The Director wishes to see measured tariffs in place that send appropriate price signals for the discretionary use of water, (eg for garden watering), where company metering programmes are sufficiently advanced, (eg seasonal tariffs). He will not require, however, any companies to put in place such tariffs by April 2000. Where companies wish to introduce such tariffs the Director will look at them positively – so long as they provide appropriate price signals and are not administratively over complicated.
• Large user tariffs (for water and for sewerage): The Director re-affirms his position that large user tariffs should be set with reference to estimates of long-run marginal costs (LRMC). Any proposed reductions by companies in their large user tariffs will need to be justified by reference to robust estimates of LRMC except where the standard volumetric tariff is below such estimates. In this case large user tariffs can be reduced to the level of standard volumetric rate. The Director also considers that where there is scope for reducing large user tariffs this reduction should be applied preferentially to the fixed charge rather than the volumetric rate.

• Charges schemes should set out details of payment arrangements for metered and unmeasured household customers and business customers.
• Both metered and unmeasured customers should be able to spread their payments through the year. Arrangements may differ between metered and unmeasured customers and should be set out clearly in charges schemes.
• Companies should make provisions for weekly or two weekly payments for customers who need them and where relevant set out their policies on targeting such arrangements. Companies should indicate their approach to handling requests for special arrangements for customers having difficulty paying their bills.
• Companies should offer a reasonable range of methods of payments, taking account of the needs of different groups of customers. This should include arrangements for cash payments which are free of charge and at reasonably accessible locations.
• Companies should continue to make use of the Direct Payment Scheme in appropriate cases.

• Companies should make provision for customers' requests for the installation of a meter free of initial charge where the expense is considered reasonable. Companies should consider requests for single meters and single bills for [multi-occupied] properties. Ofwat will determine disputes as set out on page 17 of the consultation paper, accepting that in some cases a second meter may be treated as a reasonable expense provided the cost is not disproportionate.
• Subject to taking proper account of customers' views, companies will have the final decision on where the meter should be sited.
• Companies should install meters within three months of application. Companies, who have not previously offered meters free of installation charge, may request that this timescale be extended to up to six months for the year 2000-2001 only.
• Where the installation deadline is not met, companies should make provision to ensure customers are not financially worse off as a result.
• Companies should offer an assessed charge where it is impractical or unreasonably expensive to install a meter. As far as practicable the charge should reflect likely consumption.
• All companies should make reference to the entitlement to the installation of a meter free of charge on, or with, all unmeasured bills.
• Companies should allow customers to revert to an unmeasured charge up to one month after issue of the bill detailing consumption after 12 months. They should set out how customers will be informed of the date on which their entitlement to revert expires.

Return to contents

1. COST-REFLECTIVE CHARGING AND VULNERABLE GROUPS

The Director sought views on the following question:

Q1. What is the scope for and desirability of, departing from cost-reflective charging principles for regulated charges?

Cost Reflective Charging

In the consultation paper the Director stated that three objectives – fairness and equity, incentives to customers and companies, simplicity and comprehensibility – should be used to frame the main criteria by which companies' charges schemes should be assessed.

The Director also stated that these objectives are best achieved by continuing to apply the principle of broadly cost reflective charging, but that he wished to follow an evolutionary approach in developing these principles.

Respondents' views

The majority of respondents supported the three charging objectives proposed by the Director – although some suggested that others should be added, and some noted that these objectives may sometimes be in conflict.

Most companies (and some CSCs) favoured an evolutionary approach – as proposed by the Director - to any move to wider adoption of cost reflective principles. A number of companies, however, stated that current charges are only cost reflective at broadest level and any move to "unbundle" them, and make them more cost reflective, could be both difficult - with major incidence effects - and costly to implement. Regional average charging was regarded by some water companies as an example of the existence of cross subsidy.

Director's Conclusions

The Director's main charging objectives (to do with fairness, incentives and simplicity) remain valid. Having regard to the Secretary of State's draft guidance, the Director still considers that these objectives are best achieved by continuing to apply the principles of broadly cost-reflective charging. Companies should follow an evolutionary approach in applying these principles.

At present, companies generally set their charges on a regionally averaged basis. The Director recognises that regional average charging may not be cost-reflective on a local basis.

If companies were to move away from regional average charging - based on their estimates of local cost differences - there could be considerable incidence effects as charges rose or fell locally. Companies may come under increasing pressure to de-average charges for selected groups of customers in response to local competitive pressures (eg for industrial customers). The Director believes that it would be unduly preferential or unduly discriminatory to do this just for some and not all customers. The Director also has a statutory duty to ensure that the interests of customers and potential customers in rural areas are protected.

For these reasons the Director's position has been, and remains, that if companies wish to de-average charges for one class of customer, they should de-average charges for all classes of customer (eg households as well as industrial customers). If a company proposes to de-average all charges the Director will approve this only on the basis of robust estimates of cost differences and the degree of protection that will be afforded to rural customers.

Vulnerable Groups

In the consultation paper the Director stated that decisions about protection for vulnerable groups are essentially matters for Ministers rather than the economic regulator, especially where any measure that reduces bills for one group of customers may need to be funded by higher bills for others.

Respondents' views

Policy Issues: The CSCs (and some water companies) believed that social benefits should be provided for and administered by the tax and social security systems, and not by private water companies. The CSCs stated that the Director's objectives (of fairness, simplicity and comprehensibility), which they support, could be jeopardised if new cross-subsidies within the charging system were introduced.

Whilst supporting the principle of broad cost reflectivity, the CSCs recognised Ministers' social policy objectives and were generally not opposed to:

• Offering limited protection for tightly defined vulnerable groups.
• Regional average charging to maintain continued protection for rural customers.

Most, although not all, companies also generally agreed that protection to vulnerable groups should be allowed for, but - like the CSCs - stated that these groups should be tightly defined. Indeed, a number of companies stated that such protection should only be provided to the extent they are allowed for in law – for example through Regulations. However, a few companies stated that they could (and should) go further than these statutory provisions.

There was not common agreement between the other respondents on the subject of protecting vulnerable groups. For example, the Chemical Industry Association believed that protection to vulnerable customers was not fair, equitable or cost reflective - and that if it were introduced that the cost to vulnerable (household) groups should be born solely by other household customers. In contrast the Public Utilities Access Forum and the Central Council of Physical Recreation supported a departure from cost reflective charging in order to extend the range of social tariffs for newly measured (ie volumetric and area based) customers.

Implementation Issues: To ensure transparency a number of CSCs suggested that companies should show, in their billing literature, the cost to other customers of providing the cross subsidy for vulnerable groups. The CSCs also expressed concern over the practical implementation of the proposed Regulations for protecting vulnerable groups. Specific concerns included:

• The administrative burden that will be placed on the water companies.
• The extremely tight timetable for introducing the Regulations (and the lack of time to consult on this new policy initiative).
• How customers on existing social tariffs will be affected.

Director's Conclusions

The Director believes that the scope for departing from cost-reflective charging principles (accepting the fact that there may well be a good deal of cross subsidy in the current way in which charges are levied) is limited. This is particularly so given the fact that the Director has a duty to ensure no undue discrimination or undue preference in setting charges.

Following the consultation the Director continues to believe that decisions about the protection for particular customer groups are essentially matters for Ministers rather than the economic regulator. This position is in line with the Government's White paper A Fair Deal For Consumers (Cmd 3898) which states that the implementation of social measures should be backed by new, specific legal provision.

Generally speaking, the Director considers that cross-subsidies for vulnerable (metered household) groups should only be allowed in company charges schemes where they are provided for in Regulations. In reaching this conclusion the Director has had regard to the draft guidance from the Secretary of State.

He will be reluctant, therefore to approve the introduction by companies of new social tariffs for 2000-2001. It will be for companies themselves to propose whether any existing tariff provision for vulnerable groups should continue in the light of Regulations to be made.

As well as any specific protections, charges schemes will need to make reference as to how companies will determine whether customers are eligible for protection under Regulations and how schemes will operate. The Director will not approve charges schemes which are not accompanied by an appropriate protocol setting out the detailed administrative arrangements, in particular how claims for protection will be audited by companies to ensure they are, and remain valid.

Respondents' other main request to move away from cost-reflective charging principles has stemmed from proposals (by some sewerage companies) to move to a site area based charging system for surface water drainage. Whilst area based charging systems are a more cost reflective method for charging for surface water drainage, certain sensitive properties (ie those with low RVs and high surface areas such as schools and hospitals) may face large bill increases as a result of the transfer process. Companies should, therefore, be aware of the potential incidence effects of adopting such a charging system for non-household properties, and should not introduce such systems until they have satisfied the Director that there are acceptable processes for handling such incidence effects.

Return to contents

 2. APPLICATION OF PRICE REDUCTIONS IN APRIL 2000

The Director sought views on the following question:

Q2. How should companies design their tariffs so as to ensure they remain broadly cost-reflective and preserve incentives to efficiency when they implement any price reduction for 2000-01 (the P_o adjustment)?

GENERAL APPLICATION OF THE P_o ADJUSTMENT

The Director invited views on how the expected price reductions in 2000-2001 (the P_o adjustment) should be applied by companies to different customer groups.

Respondents' views

The CSCs wanted the P_o adjustment to be applied to all customers (with the possible exception of very large users) in a transparent manner. Indeed many CSCs wanted customer bills to show how the P_o adjustment had been applied to their charges. Most companies also suggested that P_o should be applied to all customers in a transparent manner.

Some CSCs requested a uniform (percentage) application of P_o. However, most CSCs and some companies accepted that the P_o adjustment could be applied differentially to support moves to greater cost reflectivity within both services – but particularly for sewerage charges.

Director's conclusions

The Director supports a transparent application of the P_o adjustment. However, the Director also believes that the P_o adjustment provides a significant opportunity for tariff rebalancing (without unwelcome incidence effects) to make tariffs more cost reflective, and companies have previously agreed this.

Balance between water and sewerage charges

It is the Director's view that the best basis for achieving a fair balance between water and sewerage charges is for water and sewerage companies to equalise the rates of return on capital employed in each service. The Director will publish (and use) an indicative split of Ks for each water and sewerage company indicating the desired relative movement of charges for each service in 2000-2001.

Respondents' views

The CSCs and companies generally agreed that water and sewerage charges should reflect the indicative split of the Ks.

Director's Conclusions

In the draft determinations published in July 1999, the Director set out indicative splits of Ks for companies to follow in setting the relative level of water and sewerage charges for 2000-2001. These were set on the basis of companies achieving an equalised rate on return on each service. The Director believes that, while the indicative split of Ks presented best meets the objective of ensuring charges are cost-reflective on a year-by-year basis there are other considerations to be aware of. He believes that it would not be sensible for charges for one service to be reduced significantly in the first year of new price limits, only to be increased in subsequent years. This could happen for a number of companies if the indicative limits presented in Draft determinations: Future Water and Sewerage Charges 2000-05, Table 9, were strictly applied in April 2000.

In those cases where this is a consideration companies should in their draft charges schemes set charges for each service, within the overall price limit set, so as to equalise rates of return on each service over the full period of the price limits. Companies' proposed price limit for each service will be discussed at the autumn tariff meetings. Final decisions about the preferred indicative split of Ks will then be made at the time of Ofwat's written comments to companies in December 1999.

Structure of the measured tariff

The Director considered` that volumetric rates should be set to encourage customers to use water efficiently. The total measured standing charge for water and sewerage should be no more than the annual customer-related costs for unmeasured customers plus the additional costs of metering.

Respondents' views

The CSCs generally agreed that the P_o adjustment should be applied preferentially to reduce standing charges (rather than volumetric rates) to incentivise customers to save water. The water and sewerage companies (WaSCs) generally thought that P_o should be applied preferentially to volumetric charges (rather than standing rates) in order to maintain what they regarded as the cost reflectivity of standing charges. One suggested it would also be numerically impossible to apply some of the P_o to their current standing charge. The water only companies (WoCs), on the other hand, thought that it would be appropriate to pro-rata or balance the P_o between both standing and volumetric charges.

Director's conclusions

The Director believes that companies need to maintain proper incentives for the efficient use of water within the structure of the measured tariff in 2000-2001. Volumetric rates should be set to encourage customers to use water efficiently. Having regard also to the Secretary of State's draft guidance, standing charges should therefore fall by a greater amount than volumetric rates.

Most companies in recent years have progressively lowered the levels of non-household standing charge. For some companies, however, standing charges for non-households remain high. Accordingly, companies should reduce such standing charges to gain approval for their charges schemes.

SURFACE WATER DRAINAGE CHARGES

The Director considered that companies should commit themselves from April 2000 to the provision of rebates for non-connection for surface drainage where a customer can demonstrate that the property concerned does not benefit from the service. The Director also wanted to see more transparency in the way that customers are billed for surface and highway drainage. He wanted companies which charge for surface (and highway) drainage through a fixed charge to show it separately on their bills and also wanted all companies to provide, at the very least, an explanation of these charges on their bills.

Respondents' views

The CSCs and some companies supported the Director's proposal on the introduction of rebates for non-connection to surface water drainage. However, there was strong opposition from three sewerage companies – the main reasons cited were the large implementation costs and incidence effects of doing this for domestic customers.

Director's conclusions

Having regard to the Secretary of State's draft guidance, the Director considers that all companies should provide for rebates for non-connection for all customers in their charges schemes from April 2000, or should provide an acceptable plan to phase in rebates in the next two charging years. Companies should set out in their charges schemes how they intend to achieve this provision. Rebates, however, would not be expected to be retrospective. Companies must ensure that these provisions are mentioned on household customer bills.

Some companies have indicated a wish to move the basis of their charges for surface water drainage onto a site area basis. It is clear from the experience of one water and sewerage company that such a move will give rise to significant incidence effects on customers. Until companies have developed a strategy satisfactory to the Director setting out how such effects should be handled, companies should not plan to implement such a change in the basis of charging for surface water drainage.

Water for discretionary purposes

The Director believes that, where company metering programmes are sufficiently advanced, appropriate tariffs to promote due economy in the use of water should be in place.

Respondents' views

There was limited support for the proposals on water for discretionary purposes – both for introducing appropriate (environmental) tariffs, and for trying to identify customers using water for discretionary purposes who would then get a lower P_o adjustment than other customers. Generally, the companies felt that their metering programmes were not sufficiently advanced or sophisticated to support our suggestions at the current time. The CSCs also raised the likely administrative difficulties in preferentially applying the P_o adjustment to customers using water for essential (rather than discretionary) purposes.

Director's conclusions

Having regard to the Secretary of State's draft guidance, the Director wishes to see measured tariffs in place that send appropriate price signals for the discretionary use of water (eg for garden watering) where company metering programmes are sufficiently advanced. Such tariffs could be seasonal tariffs. He will not require, however, any companies to put in place such tariffs by April 2000. Where companies wish to introduce such tariffs the Director will look at them positively – so long as they provide appropriate price signals and are not administratively over complicated.

Large user tariffs (for water and sewerage)

The Director considered that large user tariffs should be set with reference to the continuing cost of augmenting supply or long run marginal cost (LRMC) in order to provide for proper incentives. This means that large user tariffs may not be expected to come down by the same amount as other tariffs in April 2000.

Respondents' views

Companies (and some CSCs) expressed their continuing concern about the policy of setting large user tariffs by reference to long run marginal costs (LRMC). A few companies raised the potential for inconsistency as a result of using average costs for general price setting and LRMC for large user tariffs.

The CSCs generally believed that the P₀ adjustment should also be applied to large users – with the reservation that this should not happen if the resulting tariff is not then cost-reflective. The main exception was likely to be very large users (> 250 Ml/a) who have already seen large reductions in their charges. The majority of the companies thought that the P₀ adjustment should be applied to large users – as the reduction in charges is mainly as a result of past out performance, which the large users have a right to share.

Director's Conclusions

The Director re-affirms his position that large user tariffs should be set with reference to estimates of LRMC. Any proposed reductions by companies in their large-user tariff will need to be justified by reference to robust estimates of LRMC except where a parity adjustment with standard measured tariffs is required. The Director also considers that where there is scope for reducing large user tariffs this reduction should be applied preferentially to the standing charge rather than the volumetric rate.

The Director recognises that there are difficulties in calculating LRMC numbers and that there may be outstanding methodological issues that need addressing. Ofwat will be preparing a report on LRMC methodologies and the companies' estimates and this will be published once price limits have been set. The report will comment on the numbers themselves and provide a critique of the methodologies used by the companies.

Charges for trade effluent

The Director wished to see an appropriate balance between the charges levied for trade effluent and domestic foul sewerage. If charges for measured sewerage and trade effluent services are broadly in balance, then a comparison between the measured sewerage charge for domestic foul sewerage and a notional trade effluent charge for a similar volume and strength of domestic effluent should produce similar indicative charges. On the basis of this test trade effluent charges for some companies may need to rise in relation to their sewerage charges.

Respondents' views

Both CSCs and companies generally agreed that the P_o adjustment should be applied differentially between sewerage and trade effluent charges to bring them into balance.

Director's conclusions

The Director will require companies to maintain or move towards a balance between charges for trade effluent and their domestic sewerage charges. This balance will be assessed by the Director in the light of the calculation of the weighted differential (ie reflecting the average level of sewage treatment).

Companies will be expected to bring their charges into balance within ± 5p per m³ in 2000-2001 (see Table 23 of the 1999-2000 Tariffs report) - unless this would result in trade effluent charges having to rise significantly. In these cases the Director will accept a phased rebalancing to reach the proposed differential over two years. The scope in 2000-2001 for reductions in trade effluent charges for some companies, therefore, may be limited.

The balance between measured and unmeasured charges

The measured/unmeasured tariff differential is calculated by applying the company's measured charges to the average amount of water delivered by that company to an unmeasured household and comparing the resulting measured bill with the average unmeasured household bill for that company. The Director expects any difference, on average, between measured and unmeasured bills to be no greater than the extra costs of providing a metered service. Ofwat has calculated the additional costs of metering to be no more than £30 a year in 1999-2000 prices for water and sewerage services together.

Respondents' views

A few companies wanted Ofwat's current "parity" tests to be kept under constant review. They noted that the measured/unmeasured differential was likely to become increasingly problematic because of its impact on the rate of customer switching to meters.

Director's Conclusions

In the 1999-2000 Report on Tariff Structure and Charges, the Director set out his views on the level of the tariff differential in 2000-2001. For next year he expects the tariff differential to be maintained at the 1999-2000 level of £30 a year, indexed by RPI, ie held constant in real terms. This is consistent with pursuing a national level for the tariff differential and while at present there may be arguments for increasing the level of the differential there are also arguments for decreasing it.

For subsequent years, however, the Director is ready to review the level of the tariff differential, particularly in the light of the development of companies' metering policies. Any decision reviewing the tariff differential would be subject to consultation.

Return to contents

3. TIMING AND METHODS OF PAYMENTS

The Director sought views on the following question:

Q3. What are your views on the Director's proposals for minimum requirements on timing and methods of payment of bills and are they sufficient to protect customers' interests?

In the consultation paper he suggested the following minimum requirements:

• Charging schemes should set out detail of the payment arrangements available to metered and unmeasured household customers and to business customers, including options for the frequency of payments.
• Both metered and unmeasured customers should be able to spread payment of their bills throughout the year.
• Companies should make provision for weekly or two-weekly payments and be prepared to consider requests for special arrangements from customers having difficulty paying their bills.
• Companies should offer a reasonable range of payment methods taking account of the needs of different groups of customers.
• Companies should make provision for cash payments which are free of charge and at reasonably accessible locations.
• Companies should commit themselves to using the Direct Payment Scheme in appropriate cases.

Generally respondents agreed with the suggested minimum requirements, and the need for charges schemes to set out how these will be met. A few companies were concerned that the Director was being too prescriptive, and one company questioned the Director's powers to prescribe times and methods of payment. Companies generally considered that they already complied with the proposed minimum requirements.

The CSCs supported the proposals, and together with other customer groups, emphasised the importance of flexible payment options in allowing customers to manage their bills and in enabling efficient revenue collection by the companies. Many considered that all customers should have access to similar payment options. Some CSCs also raised the possibility of positive incentives such as discounts to encourage prompt payment.

Companies and customer representatives broadly agreed that free cash payment options should be provided. A number of companies, however, expressed concern at the potential cost of making free cash payments more widely accessible than at present. A few respondents expressed concern over the impact on rural customers of the closure of local branches of banks and sub-post offices.

The cost of providing different payment methods varies; the most expensive tend to be the very frequent payment (one or two weekly) options. While there was broad consensus amongst respondents that these costs should be shared amongst customers it was regarded as important to contain the costs involved. The companies emphasised the need to retain flexibility in targeting the more expensive frequent payment options on those customers who have most difficulty in paying, to ensure arrangements are cost-effective. Some argued that these should be available at companies' discretion rather than as a standard method of payment.

There was also wide support for the Direct Payment Scheme, which allows customers having difficulty paying their bills to have payments deducted directly from their benefits. Indeed, a number of respondents argued that the scheme should be made more widely available.

Director's conclusions

The Water Industry Act 1991 requires details of timing and methods of payment to be set out in companies' charges schemes. Under the Water Industry Act 1999 (the Act) these schemes may not now take effect unless approved by the Director. It is therefore appropriate for the Director to indicate the criteria which he will apply in deciding whether to give his approval.

Having regard to the Secretary of State's draft guidance, and in the light of the comments on his proposals, the Director confirms the minimum requirements set out above. It is important that both metered and unmeasured customers should be able to spread their payments. However, the Director accepts that there may be good reasons why arrangements for metered and unmeasured customers should differ slightly, eg to allow time for recalculation of monthly payments for unmeasured customers payments may be spread over fewer than 12 months.

In approving charges schemes he will expect companies to set out clearly their provisions for frequent payments but accepts that these may be targeted at customers having difficulties paying their bills. The Director, however, considers that all companies should flag on their bills the availability of frequent payment options for customers in difficulty.

In assessing companies' free cash payment arrangements, the Director will take account of other available payments methods and the views of CSCs, who appear broadly content with current arrangements. He is, however, unlikely for 2000-2001, to require companies to further extend their current free cash payment arrangements, but will expect companies to keep them under review as part of a package of cost-effective payment methods, which meet customers' needs and reduce the risk of increased bad debt.

4. OPTIONAL METERING

The Act gives all household customers the right to request the installation of a meter free of installation charge. Companies can refuse such requests on the grounds that installation is impractical or unreasonably expensive. The Director will determine any disputes about such refusals. Companies must include their time scales for installing meters in their charges schemes and set out what happens if they do not meet those time scales.

The Director sought views on the following question:

Q4. What are your views on the balance to be struck between facilitating optional metering and managing the pace of change? Do you agree with the Director's proposals on the way in which companies should provide customers with their entitlement to a meter free of installation charge?

(UN)REASONABLE EXPENSE AND IMPRACTICAL CIRCUMSTANCES

Generally speaking, issues of practicality are issues of expense since in most circumstances it is possible to install a meter. The Director proposed an approach to determine potential disputes that defined the expenses that it would be reasonable for companies to meet, and those which might be considered to be unreasonable.

The Director proposed that reasonable expenses should include:

• the provision of a meter;
• the cost of installation in the company's preferred location, or another normal location if the preferred location was not practical;
• the cost of reinstatement, subject to reasonable limits; and
• for internal installation an out-reader if the company considers one was necessary.

   

• the cost of separating the customer's supply pipe where it was shared with other customers;
• the cost of installing additional meters if the customer was served by more than one supply; and
• the cost of substantial alterations to existing plumbing to enable the meter to be installed.

Respondents' views

Nearly all respondents either agreed with these proposals or did not comment. One water company considered that customers would not understand the reasons for the proposals and suggested instead that Ofwat should consider the fundamental drivers of metering rather than attempt to control take-up through "hurdles". One CSC considered that reasonable expense should be defined in money terms and suggested £160. A few respondents suggested that reasonable expenses should include two meters since many flats have two supplies and a restriction to one meter could preclude such customers from the benefits of being metered.

A number of respondents were concerned that, where 'unreasonable' expense would be incurred, the Act would seem to prevent companies from agreeing to install a meter provided the customer met the 'unreasonable' expenses. In practice this may not be a significant constraint in that customers could separately arrange for any necessary internal plumbing alterations or for separating their supply pipe, so that a meter could be fitted.

Few respondents commented on the issue of multi-occupied buildings. Two companies and four CSCs agreed with the Director's proposals, while one company and one CSC disagreed. The latter pointed to difficulties in apportioning charges fairly. One CSC would prefer an assessed volume charge where individual meters cannot be fitted. Age Concern felt bills issued to landlords/housing associations would present practical difficulties: they would prefer customers to be offered assessed charges where individual meters were not possible.

Director's Conclusions

In the light of the views received the Director confirms his proposals. He accepts the point made about a second meter for some flats and that this should be treated as a reasonable expense provided the cost is not disproportionate.

The Director recognises that there may be difficulties in apportioning a single metered bill for multi-occupied buildings but this is for the customers concerned to consider before agreeing to the request for a single meter. The Director also recognises some companies' concerns about who is responsible for the payment of a single bill. It is reasonable for them to be satisfied that appropriate arrangements governing payment of the bill have been made before agreeing to a request.

The above proposals only concern the Director's general approach to disputes that he is required to determine. It is for companies to consider individual requests in the light of particular circumstances.

CHOICE OF METER LOCATION

The Director proposed that the starting principle should be that companies decide the location, provided the customer is able to read the meter. Subject to that principle customers should be offered a choice provided they meet any additional installation costs arising from their choice.

Respondents' views

Most respondents agreed (or offered no comment) that companies should have the final decision on location. Two CSCs emphasised the importance of customers being consulted on the locations and being offered the choice of paying extra for their preferred location. Ofwat National Customer Council (ONCC) however, disagreed, arguing that customers should have the final say.

No-one disagreed that customers should meet any extra expenses arising from their choice of location.

Many companies, however, expressed concern that in assessing the costs of the provisions of the Act for the purpose of the 1999 Periodic Review of price limits, the Director has assumed that generally they will install meters internally, except where there is already an external meter box in place. They argued that in practice, this assumption would constrain their ability to choose the location, and would force them to install meters internally even though some believe that generally meters should be installed externally.

Director's Conclusions

The Director will consider his assumption about the costs of meter installation in the light of representations made to him about his draft determinations of price limits. This does not affect his conclusions as set out in this paper.

In the light of respondents' support for his proposals he confirms them. In doing so the Director has had regard to the Secretary of State's draft guidance. Companies must nevertheless continue to be flexible in exercising their final say on the choice of location, especially where individual customers have special needs.

METER INSTALLATION PROGRAMMES AND TIMES

The Director proposed that companies' installation times should strike a balance between minimising the cost of installation and providing individual meter optants with a prompt service. He would, however, need to be satisfied that there were genuine cost advantages in lengthy time-scales if these were proposed.

The consultation paper raised the question of whether particular customers, such as those with payment difficulties with their unmeasured bills, should receive priority if lengthy time-scales were considered justifiable.

Where companies did not meet their agreed time-scales the Director proposed that companies' charges schemes should set out arrangements which met the principle that customers should be no worse off because of any delay.

He also proposed that companies should not allow reversion to unmeasured charges after the 12 months' statutory entitlement.

Respondents' views

Most companies who commented claimed that a cost-efficient approach to installing meters would involve a staggered approach, batching requests by locality. Many were also concerned about an initial rush of applications and a peaking of demand following the March/April billing period each year. Companies suggested various time-scales ranging from 28 days to several years, but six months was a common suggestion, at least initially, with the possibility that it could be reduced in the light of experience.

While CSCs and others recognised possible problems their suggestions were usually for three months or less.

Few respondents commented on the suggestion that installations should be prioritised for customers who might benefit more from metering due to payment difficulties with their unmeasured bills. Most of those who did comment drew attention to the practical difficulties.

There was general agreement that customers should not be worse off if there were delays in the installation of meters beyond the expected time-scales. The back-dating of estimated metered charges to the date at which the meter should have been installed was suggested as a way of ensuring this. The CSCs broadly supported this approach, although two CSCs and ONCC would also support a GSS type penalty payment.

There was no disagreement on the issue that reversion should be based around the 12 months' entitlement. Five CSCs and ONCC suggested that customers should be allowed an extra month after the issue of the metered bill showing their full 12 months' consumption (ie up to 13 months) in order that they could make an informed decision.

Director's Conclusions

Although a number of companies argue that longer time-scales will allow some economies of scale in installation costs, no hard evidence has been supplied to support their case. Ofwat notes that companies already dealing with large numbers of meter optants under their current schemes aim to install meters within much shorter time-scales. The Director recognises, however, that there is some uncertainty about future numbers of customers requesting a meter, especially for companies who have not previously offered a free installation.

Having regard to the Secretary of State's draft guidance, the Director has therefore concluded that the target period of time for installing meters should be no longer than three months. However, in areas where free metering is being offered for the first time there may be an initial rush of applicants which may impede the companies' abilities to install meters swiftly. The Director will therefore be willing to consider requests from companies who have not previously offered free installation of meters to increase this installation period to up to six months for the first introductory year. Following the initial introductory year the Director will expect all companies to review their installation times, and to meet installation times of three months or less. Companies should reflect these time-scales in their charges schemes.

Although the Director will not specifically require companies to prioritise installation of meters for customers in difficulties with payment of unmeasured bills, he looks to companies to take account of individual circumstances and be flexible in their scheduling of meter installations for customers with special needs.

Having regard to the Secretary of State's draft guidance, the Director will expect companies to make provision to ensure that customers will not be worse off as a result of any delays in the installation of meters. This may take the form of a retrospective adjustment of unmeasured charges in the light of metered consumption, or another method to be decided by each company. The provision should be specified in the companies' charges schemes. At this stage he does not envisage that penalty payments, such as those which apply in the current GSS for customers who have paid to have a meter installed, would be appropriate in the case of meters installed free of charge.

Under the Act customers are to be allowed to revert to unmeasured charging within one year of the installation of their meter. In the light of the responses received the Director accepts that customers should have sufficient information on which to base a decision about whether or not to revert to unmeasured charges. He will require companies to set out in their charges schemes how they intend to provide that customers will have this information available before the date on which their entitlement to revert expires. He would be prepared to consider provisions under which customers would be allowed to revert to unmeasured charging up to one month after the issue of the bill detailing the consumption after 12 months. In coming to this conclusion the Director has had regard to the draft guidance from the Secretary of State. Thereafter reversion to unmeasured charging should not be allowed. Companies' policies in respect of reversion should be set out in their charges schemes.

ASSESSED CHARGES

The Secretary of State, in his draft guidance, has indicated that where it is impractical, or unreasonably expensive to install a meter, customers should have the option of an assessed charge, as an alternative to the RV based charge. The Director proposed that all companies should introduce such charges.

Respondents' views

Respondents generally supported the concept of an assessed charge in the above circumstances, but there was little consensus on how such a charge should be derived.

Director's Conclusions

The Director has had regard to the Secretary of State's draft guidance and confirms his proposal that all companies should offer an assessed charge which removes any gross injustices for customers for whom a meter is impractical, unreasonably expensive and where a single joint meter for a shared supply cannot be agreed. The basis of the charge will be for companies to propose, should be specified in their charges schemes and will be subject to the Director's approval. It is important that companies do not create new incentives for customers to opt for reduced bills without a corresponding reduction in their water use. The charge should aim to reflect the expected consumption of the property concerned but also needs to be transparent. The Director therefore sees some advantage in an assessed charge linked to property type.

INFORMATION FOR CUSTOMERS

The Director proposed that companies should develop their strategy for the promotion of optional metering with a view to balancing the availability of information about the scheme with the pace of take-up of the scheme by customers. All customers should be made aware of the entitlement on their unmeasured bill, and companies should actively bring the option to the attention of customers having payment difficulties who may benefit from the switch to a meter. However, the Director proposed that companies should not engage in active promotion of the option if this would lead to significant increases in unmeasured bills.

Respondents' views

There was agreement among respondents with all of the Director's proposals, although some companies have reservations about the possibility of identifying unmeasured customers who would benefit from metering. Companies agreed that the option should be referred to on unmeasured bills, or in the accompanying literature.

Director's conclusions

In order to protect remaining unmeasured customers from significant upward pressures on bills, the Director will need to be assured that companies have adopted prudent metering policies in the interests of all their customers and sought to manage the demand for optional meters. However, he accepts that information should be available to all customers in order that they can make informed decisions.

In the light of the responses received, the Director will expect that unmeasured customers should be made aware of the availability of the free meter entitlement through a clear reference on or with their bills. Companies should set out their metering policies in their charges schemes, but are expected to undertake a prudent approach to the promotion of the scheme in general. Where customers are in payment difficulties, debt management policies should include consideration of whether a metered supply would be helpful.

ANNEX A

Charges Schemes: Checklist of Contents

In Annex C of the consultation paper Approval of companies' charges schemes in 2000-2001 Ofwat set out the elements that a 'best practice' charges scheme would include. This guide has now been revised and is set out as a checklist of the content Ofwat will expect in a satisfactory charges scheme.

The checklist sets out Ofwat's expectations in some additional areas eg large user tariffs. The checklist also differentiates between "required" items which companies must include in their charges schemes and those which Ofwat considers "desirable". All companies will be expected to include required items within their charges scheme in order for it to receive approval from Ofwat.

Ofwat recognises that some companies may also want to include items in their charges schemes that the Director will not be approving eg non-tariff basket charges, standard connection charges etc. The text of the scheme should clearly indicate that such sections are not subject to approval.

Companies should note that where a scheme is written in legal/technical language the Director may require the production of an easy to understand summary which is written in a more customer friendly style, eg in the form of an additional leaflet or booklet.

The checklist has had regard at appropriate points to draft Guidance to the Director set out in the consultation document issued by the Department of the Environment, Transport and the Regions (DETR) on 9 August 1999.

Ofwat will issue a revised version of this checklist in late November 1999/early December 1999 immediately before final comments on the draft charges schemes are sent to companies.

Details of charges (general)

Required

Desirable

• Detail all septic tank and cesspool charges and standard connection charges.
• Explain how the water and/or sewerage bill is calculated for measured and unmeasured household and non-household customers.
• Set out the process for calculating the measured bill if for any reason the meter has not been read.
• Set out the process if a customer believes the meter measuring the quantity of water supplied to its property is registering incorrectly. In addition, set out any charges for meter testing that a customer may be liable for.
• State whether or not joint billing arrangements are in force (as between water and sewerage undertakers).

Required

• Explain how surface and highway drainage charges are recovered for measured and unmeasured household customers and measured and unmeasured non-household customers.
• Detail the rebate available if a property is not connected for surface water drainage.
• Outline the process for claiming a rebate for non-connection and from when a rebate will be applied.
• Detail the charge if a property is not connected for foul drainage.
• Detail the level of the return to sewer assumption. If different for households and non-households or for internal and external meters set out the return to sewer assumption applied to each category.
• Explain how the return to sewer assumption is applied to measured sewerage charges.

Desirable

• Set out the policy if the volume of water returned to the sewer is significantly less than the assumed level.
• Set out the policy on capital contributions (if any).

Required

• Set out the Mogden formula and provide an explanation of the various unit charges.
• Set out any variations in the Mogden formula and when they are applied.
• Set out the Mogden formula for other types of waste water (other than trade effluent) if applicable.
• Detail any assessed charges and assessed strengths for specific sectors if applicable.
• Set out the standard regional strengths.
• Set out the policy on the right to charge for additional parameters and detail any additional charging components for other pollutants if applicable.
• Include details of monitoring/sampling regimes and charges.
• Set out the policy on the minimum charge.

• Provide an example of how the trade effluent bill is calculated.
• Provide detail on the exemption from the "R" charge where a customer is directly connected to the works.
• Set out the policy on charging mixed discharges (domestic sewage and trade effluent). Include an explanation on the method of assessing the level of domestic sewage discharged (ie by assessment or measurement).
• Set out the policy on the responsibility for measuring volume (ie can be assessed if appropriate).
• Explain the policy on additional samples that can be provided by the customer.
• Explain the Director General of Water Services' statutory power to determine trade effluent appeals.
• Set out the policy on capital contributions (if any).

   

Required

• Note the way in which eligibility will be determined including the relevant medical conditions and proof of eligibility required.
• Note that validity of claims may be checked with third parties.
• Note the process following application including when the charge for vulnerable customers will take effect and how any apportionment will be done.
• Describe how the charge for vulnerable customers will be calculated.
• Note the requirements for reapplication/renewal of claims.

   

Required

• Set out any qualifying threshold for payment on the large user tariff.
• State whether any large user fixed charge is supplementary to the normal standing charge based on meter size.
• State whether the large user volumetric rate applies either to all volume after a set threshold or to the total volume billed.
• Explain whether a customer has to opt to pay on the large user tariff or whether payment on the tariff automatic once a customer's consumption meets the qualifying criteria or exceeds the breakeven point.
• Refer to the process to be followed if a customer wants to pay on the large user tariff.
• Set out details of when the large user tariff will apply from eg on receipt of a written application or from the beginning of the charging year following application.

Desirable

• Explain how a large user customer's bill is calculated.
• Set out the breakeven point of the tariff ie the consumption level at which a customer will benefit from paying on the large user tariff.

Required

• Set out the liability for payment of the infrastructure charge.
• Detail the standard level of the water and/or sewerage infrastructure charge.
• Set out the categories where the standard infrastructure charge applies.
• Set out the categories where the standard infrastructure charge does not apply.
• Explain the method of calculating the infrastructure charge where the standard charge does not apply.
• Provide an explanation of the 'relevant multiplier' and how this is used to calculate the level of the charge.
• Detail the number of loading units assigned to each water appliance (fitting) and explain how this is used to calculate the 'relevant multiplier'.
• Explain the arrangements for the payment of the infrastructure charge in instalments and in particular when it is due. For the purposes of explaining when payment is due define connection.

Desirable

• State the purpose of the infrastructure charge.
• Refer to the Director General of Water Services' statutory power to determine disputes over the level of infrastructure charges.

   

Timing

Required

• Set out the standard payment frequencies available in the range of payment arrangements.
• Set out which payment options are available to measured and which to unmeasured customers, if the options differ for the two groups.
• Set out additional payment frequencies which are available on request. If any payment arrangements are only available to customers in special circumstances detail how these are targeted.
• Detail how requests for special arrangements will be dealt with.

• Refer to any other company leaflet which may help customers decide how to pay their bills, along with details of how to obtain it.

Required

• Detail all the methods by which customers may pay their bills (e.g. cash, cheque, direct debit) and state which of these are free of charge to customers. A reasonable range of methods should be available and should include cash payment (free of charge) at reasonably accessible locations, cheque (by post or at a bank/building society or post office) and direct debit.
• Any method or location of payment which may incur an extra charge (eg by cheque at a bank) should be noted.
• Detail any arrangements for collection of payments by third parties.
• Where the method of payment is linked to a specific frequency of payment (eg monthly direct debit, or weekly cash payments) this should be made clear.
• The range of locations at which payments may be made by each method should be listed. It should be clear which frequencies and methods are available at which locations.
• Companies should commit to using the Direct Payments scheme in appropriate cases and this should be specified in the charges scheme.
• Note what will happen if the customer fails to pay an instalment on the specified date.
• Where collection is arranged through a third party (eg a local council) companies should indicate, if necessary, that the range of available payment methods may differ from those set out in the charges scheme.
• Set out details of any discounts offered eg for early payment of bills.

• If standard dates are known on which Direct Debits will be taken, these could be specified.

Required

• Set out the right of domestic customers to opt for a meter free of initial charge.
• Explain what the company will accept as a "measured charges notice" and when it will consider that one has been received.

• On what basis the company will decide that the fitting of a meter free of charge is both practicable and incurs reasonable expense.
• How long it may take to install a meter.
• What will happen if the installation is delayed.
• The company's preferred location for the meter as well as whether the customer can choose an alternative location (and whether charges will apply as a result).
• Explain the procedure if a meter cannot be fitted practicably or at reasonable expense including on what basis the customer's bill will be calculated.
• Explain the customer's right to have any dispute concerning the company's refusal to install a meter free of charge determined by the Director General of Water Services.
• It should be made clear that the meter remains the property of the water company.
• The customer's right to revert to unmeasured charging should be set out. This should include the period within which the customer may revert, what will happen to the meter and when the basis of billing will be changed back to unmeasured charging.

Required

• Set out the circumstances in which household customers will be metered eg where customers have a swimming pool, sprinkler or other qualifying appliance.
• Detail the policy on metering non-household customers.
• Include the policy on metering on change of household occupancy.
• Any charges which are made for the installation of a meter when fitted at the company's request should be set out.
• The policy on reversion for customers metered at the company's request should be detailed.

• Set out the process if a property falls within the categories to be selectively metered but where it is impossible to fit a meter.

Desirable

To aid customers' understanding of the content of charges schemes provide a list of useful definitions, which may include the following:

Billing year

Common billing agreement

Connection

Domestic purposes

Domestic/Non-domestic premises

Measured/unmeasured supply

Occupier

Potable/Non-potable water

Premises

Rateable value

Domestic sewage

Trade effluent

Style of charges scheme

Required

• A contact address and telephone number for customer enquiries.

• A scheme that is written in a clear and easy to understand style.
• Include a contents page for ease of reference.
• Include a map of area served. Where the charge varies depending on where in a company's area a customer lives set out the different charging regions on a map.
• Set out the availability of additional literature and the process for requesting this information.

ANNEX B

Respondents to approval of charges schemes consultation

Water companies

Anglian Water

Bournemouth & West Hampshire Water

Bristol Water

Dee Valley Water

Dwr Cymru Cyfyngedig

Essex and Suffolk Water

Folkestone & Dover Water

Mid Kent Water

North Surrey Water

North West Water

Northumbrian Water

Portsmouth Water

Severn Trent Water

South East Water

South Staffordshire Water

South West Water

Southern Water

Sutton and East Surrey Water

Tendring Hundred Water

Thames Water

Three Valleys Water

Wessex Water

Yorkshire Water

Water UK

Ofwat Customer Service Committees

Central CSC

Eastern CSC

Northumbrian CSC

North West CSC

Southern CSC

South West CSC

Thames CSC

Wales CSC

Wessex CSC

Yorkshire CSC

 

 

 

Organisations

                  Ofwat National Customer Council (ONCC)

Public Utilities Access Forum

Royal Society for the Protection of Birds

Gloucestershire County Council

Central Council for Physical Recreation

Chemical Industries Association

Logica UK Limited

Wildlife Trusts

Age Concern

British Medical Association

Mrs A B Clarke

Richard Clifton

Dominic Cakebread

J Rippon

P F Tomalin

A J Chappel

P C Adams

Silvan Jones

S C Phillips

C Atherton

Barbara Jackson

Mrs B M Bird

C D Beale

H Sharp